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— One interesting facet is that a huge number of the companies buying the convertible preferreds are doing so from offshore tax havens. Many suspect that they short the common stock (borrow shares and sell them, hoping to replace them later at a lower price) under the shadow of secrecy. The company may not even know about the heavy short position piling up and driving its common stock price down.

In a revision coming out shortly, Vermaelen will omit Casmyn, because he thinks it failed for other reasons. But Laffer thinks toxic convertibles were a significant reason for the collapse. He doesn't remember the Merced-Global group and doesn't know for certain that the convertible-preferred shareholders were shorting the common, but says, "The only way these guys can lose is if the company doesn't have any money. If the [common] stock goes down, they get more shares on conversion; they are insulated from the downside."

Several San Diego companies have believed or suspected their common stock was subverted by convertible-preferred shareholders shorting the common shares, sometimes through a web of offshore associates. Among them are Creative Host Services, Mobile PET, and Greystone Digital Technology.

Now hear this: the Hillion/ Vermaelen study fingered the operations that had participated in the most death spirals during the 1995-1998 period. Lakeshore International, part of the Minnetonka/Merced web, had participated in 11 such financings, 20th on the list.

When he learned about such activity, McNab sued the city in Superior Court, saying that, under the San Diego charter, anybody doing business with the city must be thoroughly identified. The city argued that there was no problem: Merced and Global had said they were based in Delaware.

Believe it or not, that was sufficient, in the city's eyes. (Gawd. Just about anybody can set up a company in Delaware.) Not surprisingly, a superior court judge agreed with the city. Says Aguirre, "The provision of the charter that requires disclosure of principals doing business with the city has not been enforced. The city attorney should be conducting a proper investigation into whom the city is doing business with. Relying on the judiciary to perform the obligations of the city attorney's office is unfair and unrealistic."

The questions remain. Why does McMillin's lender specialize in loans to distressed companies? Shouldn't that have been investigated thoroughly? Shouldn't the city attorney have been concerned about the offshore involvements? Was McMillin's financial position one reason it has wiggled out of corporate promises? Did McMillin select the Minnetonka group because of its penchant for secrecy? Does the city attorney's office know anything about due diligence? Or care? Is the mishandling of the contract still another example of San Diego's government-abetted corruption?

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