http://www.washingtonpost.com/wp-dyn/content/article/2006/10/17/AR2006101700808.html By Carrie Johnson Washington Post Staff Writer Tuesday, October 17, 2006; 3:34 PM A federal judge in Houston this afternoon wiped away the fraud and conspiracy conviction of Kenneth L. Lay, the Enron Corp. founder who died of heart disease in July, bowing to decades of legal precedent but frustrating government attempts to seize nearly $44 million from his estate. The ruling worried employees and investors who lost billions of dollars when the Houston energy trading company filed for bankruptcy protection in December 2001. It also came weeks after Congress recessed for the November elections without acting on a last-ditch Justice Department proposal that would have changed the law to allow prosecutors to seize millions in investments and other assets that Lay controlled. With the judge's order, Lay's conviction on 10 criminal charges will be erased from the record. "The indictment against Kenneth L. Lay is dismissed," U.S. District Judge Simeon T. Lake III wrote in a spare, 13-page order. But governance experts said Lay's name forever will be linked with the era's most complex and far-reaching corporate fraud. "A lot of lives were ruined, both the perpetrators and the victims," said University of Tennessee corporate governance expert Joseph V. Carcello. "This happened on his watch. Even if he's not legally culpable, he's culpable as a manager." Lay, 64, collapsed in a rental home near Aspen, Colorado, about a month after a Houston jury found him guilty of conspiring to mislead employees and investors about mounting financial problems. His death unleashed vicious Internet criticism and prompted conspiracy theories that were dispelled by a coroner's report and sheriff's deputies. A man accustomed to flying in private jets and mingling with the Bush family, foreign diplomats, and owners of professional sports teams, Lay was brought low by a widening scandal after disclosures that Enron had disguised billions in debt and manufactured revenues out of whole cloth. He told the jury at trial earlier this year that he had a net worth of negative $250,000 after years of spending lavishly on homes, vacations, and his five children. Federal prosecutors baited Lay into displaying a short temper and a flair for micromanagement on the witness stand and pounced when Lay could not explain why he sold more than $77 million in Enron shares back to the company in the months before its demise. Legal analysts said the ruling by a federal judge in Houston closely hewed to long-held doctrine, which allows defendants to vacate their convictions if they die before they are able to exercise their right to appeal. The law hesitates to punish the dead, the analysts said.Samuel J. Buffone, a Washington-based lawyer for Lay, said, "We're very pleased with the ruling and are glad that the criminal case against Mr. Lay is at an end." Separately, lawyers for the Lay family Tuesday asked the court to release a $5 million bond that was secured by the homes of several of Lay's children. Regulators at the Securities and Exchange Commission can still pursue their civil case against Lay's estate, but their task will be more difficult because they can no longer introduce the fact of his conviction and instead must prove all over again that he broke the law. The SEC case has been stayed pending resolution of the criminal issues, an agency spokesman said. Ken Horton, a former Enron manager who was laid off alongside thousands of others in December 2001, said he had steeled himself for the conviction to be extinguished after word of Lay's death three months ago. But Horton, who pegged his retirement and savings plan losses in the six-figures, expressed "great" concern that he and other former colleagues would never be made whole financially. Horton said he has received only $4,000 to date. "If I got ten cents on the dollar, I would be elated," Horton said. The move shifts the spotlight onto Lay's handpicked protégé and fellow defendant Jeffrey K. Skilling, 52, who is set to be sentenced on 19 fraud, conspiracy and false filings charges Monday. Skilling, who handled day-to-day operations at Enron until his abrupt resignation in the summer of 2001, faces more than two decades in prison. Skilling is the sole survivor from Enron's top management ranks, and the one most likely to pay a heavy price for his decision to vigorously fight the charges against him. Earlier this month, Skilling laid out several avenues for appeal, including jury bias, faulty instructions by the judge, and what he called overreaching by prosecutors that infringed on his constitutional rights. Former finance chief Andrew S. Fastow, whom Skilling has painted as the man most responsible for the company's downfall, pleaded guilty to two conspiracy charges and gave damaging testimony against his onetime patrons. A separate federal judge in Houston last month granted mercy to Fastow and sentenced him to six years in prison, a reduction of 40 percent from the seemingly iron-clad deal his defense team struck with the government. The leader of an Enron employee's group later called the benefit to Fastow "a slap in the face."