I never got to the bottom of this and instead resorted to loading my Flashpaper files from a relative URL (such as ../flashpaper.swf). But recently Neil Thomas told the chattyfig list that applying System.security.allowDomain("www.mydomain.com"); would fix this problem (where www.mydomain.com is the domain where your Flashpaper file resides). I tried it and it worked! What an easy fix to this nasty problem.
I am unclear why this bug crashed Flash so hard for me; I would have understood it if the application didn't work because of crossdomain issues but crash the IDE... nothing as simple as a loadMovie should do that.
For a fix on the focusmanagement bug in Flashpaper check this post.

