GAF’s Actions Called ‘Illegal’ at Fraud Trial : Firm Alleges Jefferies Lied to Get Lenient Treatment

Opening arguments in a criminal securities fraud trial against GAF Corp. and its vice chairman, James T. Sherwin, began Wednesday with a federal prosecutor spelling out what he called a “flat-out illegal” scheme to manipulate the price of Union Carbide stock in 1986.

Assistant U.S. Atty. Carl H. Loewenson Jr. outlined for the jury a series of telephone calls between GAF officials and the Los Angeles-based securities broker Jefferies & Co., in which the broker allegedly agreed to buy Union Carbide stock to artificially bid up its price in late October, 1986.

The government claims that GAF, which makes chemicals and building materials, ordered the illegal stock market manipulation to help it get a better price for about 5 million shares of Union Carbide stock that it intended to sell after an unsuccessful attempt to take over that company.

Loewenson told the jury that “this is a case about cheating in the stock market by a large corporation and one of its chief executives.”

But later, Arthur L. Liman, GAF’s lead attorney, told jurors that records of stock price movements and Jefferies’ purchase and sale of Carbide stock contradict the prosecutor’s claims. He asserted that the case came about because the prosecution’s star witness, Boyd L. Jefferies, the founder and former chairman of the brokerage, lied to obtain lenient treatment by the government. He characterized Jefferies’ agreement with prosecutors, in which his firm was exempted from prosecution and the penalties he faced were reduced, as “one of the great sweetheart deals of all time.”

Jefferies, who pleaded guilty to two felony counts in connection with his dealings with former stock speculator Ivan F. Boesky, has been cooperating with the government. Both sides on Wednesday described Jefferies as one of the top stockbrokers in the country and as someone who didn’t always play by the rules. Liman, however, told the jury to be wary of the story told by a man he said was such a super salesman that “he could sell snow to Eskimos.”

The trial is expected to last six to eight weeks. If convicted on all 10 counts contained in an indictment, Sherwin, 54, could face up to 50 years in prison and fines of up to $2.5 million. The company and two subsidiaries also named in the indictment could face fines of up to $5 million each.