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— The activist who has kept track of just how much McMillin has put the screws to San Diego is John McNab of Save Our NTC. He says that in claiming to match Lennar's bid, McMillin promised to spend $34.3 million on the historic core and $11.9 million for the education area. But the final disposition and development agreement, pushed by former councilmember Byron Wear, had McMillin coming up with performance bonds, not cash. Also, "federal, city, and state funds have been utilized to fix the buildings in the historic core," says McNab. The burden has been shifted to taxpayers. Now McMillin is commercializing buildings in the core that were supposed to be provided to the public. "He is putting nothing into the historic core."

Also, McMillin has been relieved of the $11.9 million commitment in the education area, says McNab, who is now trying to get the city to cough up documents spelling out who wrote the disposition and development agreement that permitted McMillin to renege on the promises made to the council.

The mess at the former naval base is already front and center in San Diego politics. Kathryn Burton, running for the First District council seat against the incumbent, developer-cozy Scott Peters, notes that in midsummer, the council voted 5 to 4 against giving McMillin $8.5 million for infrastructure upgrades at Liberty Station. "Then the council went into closed session, presumably on the Chargers issue, and later, Scott Peters came out and made a motion to reconsider the McMillin vote," says Burton. "This time it passed 5 to 3 to give the money to McMillin. Peters was excused -- out of the room. Did something happen in closed session that precipitated Peters to suggest the motion to reconsider? I wonder if it was connected to the thousands of dollars he has received in campaign contributions from McMillin."

At that point, Peters had received $4000 from the developer; now it's much more, says Burton. McNab has calculated that over the past five years McMillin is tied for first place in gifts to local politicians. By contrast, Lennar gave almost nothing, says McNab.

"What has happened with McMillin has been a sequel to John Moores and the ballpark," says San Diego lawyer Mike Aguirre, who is running for city attorney. "McMillin made the promises, and step by step he has been relieved of those obligations -- sometimes as a result of council meetings behind closed doors. It has been bait and switch. The city should find if there is any way to take back the NTC property."

This disgrace might have been avoided had the city done its due diligence on McMillin's lenders and affiliates -- Merced, Global Capital, and the offshore crew. Merced is an acknowledged expert in plunking money into debt of distressed companies. It has focused on debt of financially ailing companies since its founding in March of 1990. There is nothing inherently wrong with investing in junk bonds and similar crapshoot paper, but there are often questions when the money manager has offshore affiliates, as Merced has.

And Merced and its related affiliates have put money in some real dandies. Among the bankrupt companies it invested in are U.S. Airways, Owens Corning, Kmart, Spectrasite, Fleming Cos., Dice Inc., Florida Coast Paper Finance, NTL Communications, and Arch Wireless.

Merced and affiliates found some scandal-plagued ones, too. A short list includes Rite-Aid, whose top officers got in deep trouble for phony accounting long before Enron's bubble burst; Nortel Networks, once Canada's darling, whose stock plummeted from $124 to $1.50 as more than 60,000 workers lost their jobs and the chief executive retired with $100 million; Calpine, which was deeply involved in the California energy crisis and has sunk financially; and EasyLink Services, a high-flyer that crashed while the current head of the Securities and Exchange Commission, William Donaldson, was a board member. Donaldson was also a member of the compensation committee when it voted to forgive a $200,000 loan to the chief executive officer even though the company was losing money by the bushel.

Oh, yes. There was also ML Media Partners, one of whose subsidiaries was in a failed venture with Adelphia Communications, one of the major fraud scandals in recent years. And there was Adaptec, which ran afoul of the Internal Revenue Service for its 1994, 1996, and 1997 tax returns. And in late November, its former president pleaded guilty to giving misleading answers under oath to the Securities and Exchange Commission, which was investigating unusual trading of Adaptec shares.

And there is the bizarre story of Casmyn Corp., which brings us to toxic convertibles and death spirals. Casmyn was a gold-mining company with assets in Zimbabwe and Zambia, among other places, and a board of directors including Laffer and none other than the late Baron Edmund de Rothschild. Casmyn plunged in ignominy as its chief executive disappeared. Before that happened, Laffer had discovered financial mismanagement, written a memo about it, and resigned.

The Minnetonka group bought convertible-preferred stock in Casmyn, and after converting it to common stock, at one point owned 5.6 percent of Casmyn's common. Merced was one of the Minnetonka entities owning Casmyn paper.

Three years ago, two French economists, Pierre Hillion and Theo Vermaelen, published a seminal paper on toxic convertibles. It featured Casmyn prominently. More important, it had eye-popping statistics and conclusions. The economists studied 487 death spirals between 1995 and 1998. An investor who bought the common stock (not the preferred) lost, on average, 34 percent one year after the convertible issue, and stocks of 85 percent of the firms issuing convertibles declined during the period. (And remember, this was happening during a big, rowdy bull market.)

The paper suggested that the holders of the convertible-preferred stock would short the common stock or bet on its decline. The shorting pressure would push the common stock price down hard. The preferred shareholders, getting more common upon conversion, could end up controlling the company, or at least making bucks on both the buy and short sides. These are "a manipulator's dream," said the two French economists. Indeed, the strategy is "almost risk-free."

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