Judge Sim Lake ruled that since Lay had died before he was sentenced or given the opportunity to appeal, and since court precedent did not permit the court to enter an order of restitution against Lay’s estate, the conviction must be thrown out.
The decision by a federal judge in Houston, Texas, means Lay’s estate will not have to forfeit tens of millions of dollars that the court had ruled were fraudulently obtained.
However, thousands of people who lost their jobs and life savings when the Texas-based energy giant collapsed in 2001 will still be able to sue Lay’s estate in civil court.
Enron collapsed with an estimated debt of about $40bn that had been hidden through complicated investment strategies obscured in its financial statements.
Lay, who was convicted of six counts of fraud on May 25, died of a massive heart attack on July 5.
Prosecutors of Lay had argued against his family’s request to vacate the sentence on the grounds that the Lay estate “should not be unjustly enriched with the proceeds of fraud that would otherwise be subject to forfeiture and distributions to Lay’s victims”.
On Tuesday, a justice department spokesman said that the ruling “does not change the fact that Mr Lay was found guilty after a four-month jury trial and a separate bench trial”.
“We will continue to pursue all remedies available for restitution on behalf of the victims of the fraud at Enron,” said Bryan Sierra.
The corporate bankruptcy, then the largest in US history, rattled stock and energy markets and undermined public confidence in the business sector.
The decision comes as Jeffrey Skilling, the former Enron chief executive found guilty of 19 of 28 counts of fraud and conspiracy, is due to be sentenced.
He faces a maximum penalty of 185 years in jail.