The Chronicle’s Loren Steffy thinks I’m stretching a bit in noting the conflict of interest that the Wall Street Journal has apparently decided to overlook in allowing John Emshwiller to report on the upcoming trial of the Enron Task Force’s legacy case against key former Enron executives Ken Lay, Jeff Skilling and Richard Causey.

Candidly, I don’t think the point is a stretch at all. The following explains why.

Along with many others, Emshwiller has promoted the now common theme that Enron was merely a house of cards and that the company’s intrinsic instability was hidden from the investing public by a deceitful management team.

That view has been readily embraced by a wide-range of societal forces, such as publicity-seeking politicians who don’t allow facts to get in the way of demonizing unpopular entrepreneurs for political gain, government prosecutors who improperly expand the reach of criminal laws to further their careers, competing businesspeople and lawyers seeking to profit from Enron’s demise, and a general public that finds it easy to resent wealthy businesspeople, particularly after the bursting of a stock market bubble.

These societal forces believe that they understand the Enron morality play so thoroughly that otherwise thoughtful and intelligent people lose the capacity for independent thought regarding Enron and reject any notion of ambiguity or fair-minded analysis in ferreting out the truth of what really happened at Enron.

Unfortunately, this common view of Enron ignores the more nuanced view of a growing number of business experts who have studied Enron’s core businesses and have a far better understanding of Enron’s business practices than most of those who have promoted the Enron morality play.

In many ways, Enron was an innovative firm, both in its primary business activities and in the ways in which it raised money. Experts in structured finance and derivatives recognize this and have already written extensively about Enron’s remarkable innovation (see, for example, Christopher Culp and William Niskanen‘s Corporate Aftershock: The Policy Lessons from Enron and Other Major Corporate Corporations and Culp’s subsequent book, Risk Transfer: Derivatives in Theory and Practice).

Even Enron’s original purpose in using special purpose entities (“SPE’s”) — at least before former Enron CFO Andrew Fastow and henchman Michael Kopper hijacked them — was sound and creative.

With equity owned primarily by investment banks and other financial institutions, the SPE’s were initially intended to be private equity funds with completely separate management from Enron. The main attraction of the SPE’s for investors was the funds’ preferred right to invest in Enron assets, which benefited Enron by allowing the company to preserve liquidity and hedge risk.

A side effect of this drive toward innovation was that Enron pushed the edge of the envelope between beneficial innovation, on one hand, and excessively complicated transactions that appear to have been designed to confuse more than to accomplish a legitimate business purpose, on the other. Fastow and Kopper’s shenanigans with certain of Enron’s SPE’s are a good example of the latter type of activity.

Nevertheless, Enron was engaged in mostly legitimate and beneficial financial activities, including energy trading, structured finance and other financing transactions that had literally never been attempted before, and certainly never on the scale that Enron generated them.

The societal demonization of Enron contributed substantially to an enormous amount of unnecessary wealth loss as many of the markets for such beneficial and innovative financial transactions shriveled in the wake of Enron’s liquidation.

Consequently, it is critically important in determining the truth of what happened at Enron — particularly when the futures of three men and their families are at risk — to distinguish between Enron’s role as a legitimate, innovative company and the fraud that took place.

Emshwiller’s already published views toward Enron reflect that he is a poor choice to make that key distinction.

In fact, the situation with Emshwillier, the WSJ and Enron is eerily reminiscent of a situation that arose at the Journal almost 20 years ago in connection with Rudolf Giuliani’s career-boosting prosecution of Michael Milken.

Back then, it was WSJ reporter James Stewart who became the mouthpiece for Giuliani’s propaganda campaign that demonized Milken’s revolutionary financing techniques that literally unlocked billions in shareholder wealth during the 1980’s.

Stewart followed up his highly misleading WSJ reporting on Milken with a book that perpetuated the same prosecutorial myths about Milken and utterly ignored Milken’s role in the tremendous wealth creation and innovation in financial markets that occurred during the 1980’s.

Daniel Fischel brilliantly exposed both Stewart and Giuliani’s duplicity with regard to Milken in his 1995 book, Payback: The Conspiracy to Destroy Michael Milken and his Financial Revolution. Despite the wise perspective that Fischel provides regarding the grave danger to justice, the rule of law and wealth creation that results from unleashing the power of government against the unpopular businessperson of the moment, precious few of the hundreds of people with whom I have spoken or corresponded regarding the Enron case even know about Fischel’s book, much less have read it.

Given the WSJ’s experience with Stewart in the Milken debacle, it’s at least odd that the Journal appears to be overlooking the high risk that a similar journalistic failure may occur in regard to Emshwiller’s coverage of the Lay-Skilling-Causey trial.

The warning signs are clearly there — Emshwiller completely missed on the government’s overreaching destruction of Arthur Andersen and has largely ignored the prosecutorial misconduct that has marred the Enron Task Force’s handling of all of the Enron-related prosecutions.

Perhaps most notably, Emshwiller has said virtually nothing about the outrageous miscarriage of justice that landed four Merrill Lynch executives in jail for doing nothing other than being involved in a relatively small transaction with the social pariah Enron.

So, count me as skeptical that Emshwiller is capable of providing the type of objective reporting regarding the Lay-Skilling-Causey trial that readers of America’s leading financial newspaper deserve.

The Wall Street Journal can do much better.

The Wall Street Journal’s ($) John Emshwiller reports that former Enron chief accountant Richard Causey is currently negotiating with Task Force prosecutors regarding a possible plea bargain under which he would testify against his former bosses, Ken Lay and Jeff Skilling, in the upcoming Enron legacy criminal trial scheduled to begin in Houston federal court on January 17, 2006. A subsequent WaPo article on Causey’s plea bargain negotiations is here and the Chronicle story is here.

The gist of Emswiller’s piece is that the Task Force is focusing on statements that Causey made to investigators early in the Enron criminal investigation to the effect that Enron had adequate internal controls in place to limit the risk of Andrew Fastow using his position as both Enron’s CFO and as the control person in various special purpose entities doing business with Enron to harm the company.

The prosecution contends that Causey’s statements to investigators — as well as Lay and Skilling’s similar public statements regarding the controls — were false and that the executives knew that the controls on Fastow’s dual positions were inadequate.

The three executives contend that Enron’s internal controls were both extensive and reasonable, but that no control can absolutely prevent someone such as Fastow from using his position to perpetrate a fraud on the company if he is intent on doing so.

Frankly, neither Causey’s plea bargain negotiations nor Emshwiller’s story are particularly surprising. Given that Causey is facing the equivalent of a life sentence if he chooses to defend himself without access to his full net worth in a case in which much of media (including Mr. Emshwiller — see his Enron book, 24 Days: How Two Wall Street Journal Reporters Uncovered the Lies that Destroyed Faith in Corporate America) has already concluded that he is guilty, it is understandable that Causey would at least explore all options that would hedge that substantial risk of loss.

Likewise, the Enron Task Force has frequently used the media throughout its dubious handling of the criminal investigation of Enron to pressure former Enron executives into questionable plea bargains.

By the way, Emshwiller has already published questionable conclusions about Enron that are clearly adverse to the three former executives. Moreover, through his book, he has a financial interest in seeing that even his most dubious conclusions are confirmed during the upcoming trial.

Why on earth is a media publication of the Wall Street Journal’s caliber having someone with such an obvious conflict of interest covering the Lay-Skilling-Causey trial?