Jefferies Emerges From GAF Trial With Harsher Image


Even after pleading guilty to a pair of felonies nearly two years ago, Boyd L. Jefferies enjoyed a cleaner reputation than others caught in the securities industry corruption scandal.

The word from his lawyers, colleagues and Jefferies himself was that his crimes were minor violations of arcane laws, an innocent reflection of the master trader’s zeal to accommodate clients.

“These were extremely technical, really closer to civil violations,” Jefferies, the founder of Jefferies & Co., said in an interview a year and a half ago.

But now a harsher image is emerging of how Jefferies turned the Los Angeles company into perhaps the most aggressive and innovative stock trading firm off Wall Street.


And once again the source is Boyd L. Jefferies.

The new tale is being told in a federal courtroom in Manhattan, where the former executive is the prosecution’s star witness in the criminal trial of chemical company GAF Corp. and its vice chairman.

On Tuesday, the judge declared a mistrial in the case, ruling that the government’s failure to disclose possible tampering with a key piece of evidence hurt the defendants unfairly. The judge said the second trial would begin Thursday, which will put the spotlight back on Jefferies.

In his debut on the witness stand last week, Jefferies, 58, described how he inflated the price of Union Carbide stock so his client, GAF, could sell 10 million shares at a higher price. He also acknowledged participating in illegal schemes with at least four other customers but did not provide details.

He said he destroyed business documents routinely, even as he was negotiating his agreement to cooperate with the government. And he admitted funneling thousands of dollars in illegal campaign contributions to politicians through company employees.

Jefferies is not the only witness expected to provide a glimpse behind the scenes at the firm. Another witness on the government list is the firm’s director of trading, James Melton, who was described by a prosecutor as having “joined the (GAF) conspiracy and carried out the illegal arrangement.”

As part of its plea bargain with Jefferies, however, the government agreed not to prosecute other employees and not to revoke the brokerage license of Jefferies & Co. for his acts.

Michael L. Klowden, a lawyer with the firm’s outside counsel, Morgan, Lewis & Bockius, and a director of the brokerage’s parent, Jefferies Group, said a company inquiry found that employees involved in violations were following orders from Jefferies and did not act independently.

Highly Successful Trader

As a result, no one has been fired for participating in any of the schemes. But the brokerage firm has instituted new internal controls and hired Paul Bodor, a former official with the Securities and Exchange Commission, to monitor compliance with U.S. securities laws.

Before pleading guilty in April, 1987, and resigning from the firm, Jefferies was one of the most successful traders in the country. His tenacity and creativity in executing huge trades for large institutional clients and takeover specialists had turned his 25-year-old firm into a force in the merger arena.

Along the way, the former cattle ranch laborer had become wealthy. His salary and bonus in 1986 totaled $1.8 million and he owned 13% of the company. He sold a home in Laguna Beach for $8.3 million in 1986 and bought a house in posh Indian Wells, near Palm Springs, to go with his ski home in Aspen, Colo.

When his involvement in the Wall Street scandal surfaced, associates blamed his passion for trading and accommodating customers. The charges to which he pleaded guilty did not have the odor of self-enrichment that marked the pleas of earlier defendants, such as investment banker Dennis B. Levine and stock speculator Ivan F. Boesky.

One count involved hiding stock owned by Boesky on the books of Jefferies & Co., a practice known as “parking.” The other covered permitting an undisclosed investor to buy stock without putting up at least the 50% cash required by law, a “margin” violation.

Even when the press reported that the margin violation involved the stock of Fireman’s Fund and other details of Jefferies’ activities began to leak out, the extent of his stock manipulation remained masked.

In recent weeks, however, a clearer picture of what Jefferies did began to emerge.

On Nov. 3, stock speculator Salim B. Lewis was indicted on conspiracy and stock manipulation charges in connection with alleged efforts to inflate the price of Fireman’s Fund stock.

Linked to Bilzerian

According to the charges, Lewis arranged with Jefferies to buy 410,000 shares of Fireman’s Fund to boost the price the day before American Express sold stock and warrants in the company to the public. Lewis has a long connection with American Express, but no one at the financial giant has been accused of wrongdoing or involvement.

On Dec. 21, corporate raider Paul A. Bilzerian was indicted on 12 counts of securities and tax fraud connected with four takeover attempts in 1985 and 1986. Again, Jefferies was at the center of the allegations.

The scheme hinged on secret deals between Bilzerian and Jefferies to conceal the raider’s ownership of stock in four companies, according to the charges.

Another alleged secret deal by Jefferies forms the basis of the charges against GAF, also a big client of Jefferies & Co.

This time, prosecutors charge, Jefferies agreed to buy blocks of Union Carbide stock to push up its price so GAF could unload 10 million shares at a higher price. GAF had acquired the shares in an aborted attempt to take over Union Carbide.

Jefferies testified that he struck the deal with James T. Sherwin, the GAF vice chairman indicted by the government.

“Mr. Sherwin called me and asked me in summary and in substance if they wanted to have Union Carbide close at a specific price for several days in a row, would I be willing to do that, and I said yes,” said Jefferies.

He said Sherwin promised to make up any money Jefferies lost in the trades. Jefferies said he later sent GAF a fraudulent invoice for $40,000 in phantom investment banking services to cover his losses. The government claims fraudulent invoices were also used in Jefferies’ dealings with Boesky and Bilzerian.

Under questioning by a GAF defense attorney, Jefferies also admitted using company employees to conceal illegal campaign contributions to politicians. The political twist surprised the top brass at Jefferies & Co., according to Frank Baxter, the longtime associate who became chief executive when Jefferies left.

Jefferies said he reimbursed employees for contributions made to unnamed politicians, a violation of federal election law. One politician received about $17,000 in the scheme, he said.

Girl Scout Cookies

A person familiar with the arrangements said Jefferies had been asked by clients to help raise money for politicians but that he was unsuccessful. So Jefferies told employees to make the contributions and he reimbursed them with his money.

“It was sort of like when my daughter can’t sell enough Girl Scout cookies and I buy them from her,” said one of the employees involved.

Under questioning by a defense attorney, Jefferies said his picture still hangs in the entry of the firm’s headquarters in downtown Los Angeles and that he would like to return once his five-year suspension from the securities business ends.

Baxter refused to discuss the prospects for Jefferies’ return, but another official close to the firm said: “It’s wishful thinking that he’ll ever be back.”

His sentencing has been postponed until Jefferies finishes testifying for the government. The maximum sentence is 10 years, but Jefferies said in court that he hopes to avoid prison.

“He still views himself as a guy who got caught going through a red light, compared to people who were seriously and consciously violating the law for personal gain,” said a friend.