GAF Defense Offers a Theory on Unusual Carbide Stock Trades

Times Staff Writer

In closing arguments in the GAF Corp. stock manipulation trial, defense lawyer Arthur Liman for the first time spelled out a theory of why a Los Angeles-based brokerage firm made a series of unusual purchases and sales of stock in late 1986.

Liman contended that an erratic pattern of buying and selling Union Carbide stock was carried out so that the brokerage, Jefferies & Co., could make a profit, and to help persuade GAF to use Jefferies & Co. to sell a 9.6-million-share block of Carbide shares that it was preparing to unload.

Prosecutors have accused GAF and its vice chairman, James T. Sherwin, of explicitly ordering Jefferies & Co. to bid up the market price of Union Carbide’s stock at a time when GAF was hoping to sell off its big holdings of Carbide shares.

In his own summation on Tuesday, Assistant U.S. Atty. Carl H. Loewenson Jr. had told jurors that evidence in the case persuasively shows a conspiracy between Sherwin and Jefferies & Co. to illegally manipulate stock prices. “The facts and circumstances make it clear that it was Sherwin and GAF that asked Jefferies & Co. to carry out those trades,” Loewenson said. “The ultimate goal of this scheme was to make more money for GAF on the sale of its block of Union Carbide.”


Witness Called Liar

But in a presentation to the jury that began Tuesday and continued all day Wednesday, Liman contended that the government’s main witness was a liar and that the prosecutors’ theory of what happened simply didn’t match the pattern of trading.

The chief government witness was Boyd L. Jefferies, former chairman and chief executive of Jefferies & Co., who pleaded guilty to two felony counts in 1987 and agreed to cooperate with prosecutors. Arguing that Jefferies’ testimony was uncorroborated during the trial, Liman told the jury, “Boyd Jefferies’ testimony is implausible, contradictory and it is filled with lie after lie.”

The case is being watched closely by prosecutors and white collar crime defense lawyers. It is the first in the series of criminal cases that began with stock speculator Ivan F. Boesky to actually come to a trial. The lawyers are anxious to see how a jury of lay men and women responds to a complex securities fraud case in which technical testimony about stock trading is crucial.


It is also being viewed as an important test of Boyd Jefferies’ credibility. He is expected to be the government’s main witness in two other pending cases, against takeover speculator Salim B. Lewis and corporate raider Paul Bilzerian.

No Sustained Effort

Lawyers in the GAF case are expected to finish their summations today. The case probably will go to the jury on Friday, after U.S. District Judge Mary Johnson Lowe instructs the jury of nine men and three women on the law.

After one charge was dropped last week, eight criminal counts are pending against Sherwin and GAF, including conspiracy, stock price manipulation and securities fraud.

Evidence in the case showed that at the beginning of October, 1986, GAF held 9.6 million Union Carbide shares after an unsuccessful attempt at a hostile takeover of Carbide, a chemical maker.

At the end of that month, Jefferies & Co. bought about $4 million of Carbide stock, in purchases made just before the daily close of trading to boost the stock’s closing price, the indictment charges.

But on Nov. 3 and 4, 1986, Jefferies sold the stock at a loss, and it wasn’t until Nov. 10, after the stock’s price had fluctuated considerably, that GAF actually sold off about half of its Carbide shares.

Liman argued that the pattern of purchases, sales and then later purchases in November of Carbide stock by Jefferies & Co. wasn’t consistent with a sustained effort to inflate Carbide’s stock price. Instead, he argued, Jefferies & Co. was trading in the stock simply to make a profit.


And he argued that some of the purchases were intended to put Jefferies & Co. in a position to make a $1-million profit if GAF selected the brokerage to sell off the block of stock. Most of the stock was ultimately sold by Salomon Bros.