San Diego — A cork afloat on the ocean bobs up and down. By contrast, developer Corky McMillin bobs and weaves, to and fro, when discussing finances. It's time to uncork the secrecy behind the Corky McMillin Companies' financial backer -- a Minnesota-based group of hush-hush entities specializing in bottom-fishing, or buying junk debt of troubled or bankrupt companies.

It does some of that fishing from secret offshore tax havens. And disturbingly, through an offshore haven, it has been deeply involved in so-called "death spiral" or "toxic convertible" financing -- a process that scholars say is destroying companies and investor wealth.

The Minnetonka, Minnesota-based operation is EBF & Associates. Under its wing is Merced Partners, which is McMillin's lender at the extremely controversial Naval Training Center (NTC) conversion, now called Liberty Station, and at Otay Ranch. Merced is managed by another EBF operation, Global Capital Management.

Global, in turn, is the general partner of Global Bermuda Limited Partnership, based in the tax haven of Bermuda. In addition, Global Capital is investment manager of Lakeshore International, also sheltered by Bermuda's code of omerta. Lakeshore is called "the Offshore Fund" in official filings. In the late 1990s, Lakeshore was one of the major entities involved in death spiral and toxic convertible financing -- a process that famed La Jolla supply-side economist Arthur Laffer, who has seen the death rattle firsthand, describes as "terrible. It's not just one guy stealing from another. It destroys wealth. It takes real resources and makes them worthless. It destroys the whole company."

I will describe toxics and the death spiral in more detail below, but one thing is certain: you will get nothing out of Minnetonka. EBF does not respond to queries. I left two messages but was told that the company is private and does not talk.

McMillin is no better. I got no response to multiple calls. Several months earlier, when I first started to work on this project, I was officially told that McMillin and the Merced-related entities were both privately held. Ergo, no talkee. In my recent calls, I explained that, private or not, McMillin and Merced are involved in a very public project, spending taxpayer money. After all, McMillin paid $8 for property that is worth $1 billion, and on which the city has spent $11 million to acquire. And people are howling that McMillin has not come close to living up to his initial promises.

Sorry. Silence. Predictably, the city attorney's office isn't talking, either. However, there are public documents that the Minnetonka entities and the sick companies they invest in must file. But it takes time to dig them out online.

Back when the developer was lobbying the city council to get the Naval Training Center conversion contract, Corky McMillin was asked about Merced and its representative, who had earlier addressed the council. Replied Corky, somewhat disjointedly, "He's from Minnesota. Yes, he's a partner of ours at Otay Ranch so we have, uh, he has meetings out here every month -- either he or his financial agent -- and what happens is, uh, it's a lot like, I guess, in a public company. You buy stock in a company, and you own stock in that company. and if the company becomes worth more money, your stock becomes [worth] more money. What he does is loans an entity that my family is responsible for this money, he loans the money to us, and then the money is completely within our control." But, added Corky, "We keep him up to date."

Actually, an expert panel appointed to assess the financial stability of the companies bidding on the conversion job did not recommend McMillin.

In 1993, the Federal Base Closure and Realignment Commission decided to close the Naval Training Center. The city was named local redevelopment authority. In 1997, the city council made the job an official redevelopment project. The city manager appointed a six-person committee, headed by Milton (Mickey) Fredman, to assess bids from five developers.

The committee chose a subsidiary of Miami-based Lennar Corp., generally considered among the best-managed and most solidly financed American developers. The city manager concurred. The committee pointed out that Lennar would take full responsibility for the "historic core," including spending $33.9 million on infrastructure and rehabilitation of historic buildings. And Lennar would spend $14.3 million on similar activities such as rehabilitating the "education core."

Moreover, Lennar could finance the deal internally -- not relying on an outside lender, pointed out the committee. And Lennar had experience on other military conversion projects. McMillin came in second.

The committee asked McMillin about its financing but did not get down to nitty-gritty details, Fredman says. "They [McMillin] probably did show us one of their financing partners. The main thing was several items that Lennar offered that McMillin did not. The only reason we left McMillin as second choice is that it was local."

The committee had specifically asked McMillin whether it would match Lennar on the most important particulars, "and they said they wouldn't do it," says Fredman.

Then, recalls Fredman, Lennar and McMillin made their pitches to the city council. Under the ground rules, neither company was to alter the plan presented to the committee. Lo and behold, "McMillin completely changed it and started matching everything Lennar had offered," says Fredman. After McMillin changed its bid, the contract was created. "But when the contract was drawn up, it was not that way. They changed again," says Fredman.

"They [McMillin] were to come up with $10 million or $15 million for the arts [section], but now it's a loan, changed in their favor. Council permitted it. Most of us were very upset. We wrote a letter telling [city government] we were very upset -- that had not been what they [McMillin] had offered."

Why the favoritism for McMillin? Councilmembers admitted that one reason was that McMillin has donated very generously to local politicians. Also, the company has made civic gestures, supposedly for altruistic reasons. Sums up Fredman: "This guy [McMillin] was going to do so much for the city, and so far he has screwed [it] every way he can."

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."

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?