GAF, Its Vice Chairman Are Indicted on Charges of Manipulating Stock

NEW YORK — GAF Corp. and its vice chairman were indicted Wednesday on criminal charges of using a Los Angeles stock brokerage to manipulate the price of Union Carbide Corp.’s shares in 1986.

The federal charges were said to result from cooperation with prosecutors by Boyd L. Jefferies, former chairman of the Los Angeles-based brokerage firm Jefferies & Co., who pleaded guilty in March, 1987, to charges arising from the Ivan F. Boesky scandal.

GAF failed in a 1985 attempt at a hostile takeover of Union Carbide but threatened to try again until October, 1986, shortly before it sold most of its 10% stake in the big chemical company.

The indictment accuses GAF of secretly arranging with two employees of Jefferies & Co. to buy Union Carbide shares to artificially bid up the market price of the stock in late October, 1986. The alleged purpose was to create the impression among investors that there was heavy demand for Union Carbide stock so that GAF would get a better price when it sold off the shares.

Rudolph W. Giuliani, the U.S. attorney in Manhattan, said Jefferies & Co. and its employees will not be prosecuted in the case because both the firm and Boyd Jefferies have signed agreements to cooperate with the government. Giuliani said the agreements bar prosecution of the firm.

10-Count Indictment

The indictment is the first criminal prosecution in months to result from the investigations sparked by Boesky’s guilty plea in 1987 and cooperation with prosecutors. Giuliani declined to say whether his office is getting closer to filing charges in several other pending insider trading investigations.

The GAF case marks a new departure in the investigations: It is the first to implicate an industrial corporation in wrongdoing in connection with efforts to take over other companies. The other cases so far exclusively involved firms and individuals in the securities industry.

GAF, based in New Jersey, is a maker of chemicals and building materials and has been active in attempting to acquire other companies.

The 10-count indictment returned Wednesday names James T. Sherwin, 54, GAF’s vice chairman and chief administrative officer, as well as the corporation itself and two subsidiaries. Among other charges, they are accused of conspiracy, stock price manipulation and securities fraud.

Giuliani said the investigation of GAF is continuing and may lead to charges against other individuals. He declined to say whether Samuel J. Heyman, chairman and chief executive of GAF, is a possible target of the investigation.

In a statement, GAF said the company’s board of directors “expressed its full confidence in Jim Sherwin and its deep disappointment in the governments’ decision to bring these unprecedented charges.” The statement said: “Both the company and Mr. Sherwin intend to vigorously defend the case and are confident of complete vindication.” A spokesman said Sherwin would not be suspended from his GAF positions.

50 Years in Prison

Neither Sherwin nor Heyman could be reached for comment.

If convicted on all of the criminal charges, Sherwin would face a maximum sentence of 50 years in prison and fines of up to $2.5 million. The company and the two subsidiaries named in the indictment face maximum fines totaling $15 million.

The indictment did not identify the two Jefferies employees who allegedly participated in the GAF scheme, and a spokesman for the brokerage said it is the company’s policy not to comment on investigations resulting from its cooperation with federal prosecutors. However, sources said one of the employees is Boyd Jefferies himself. The other is said to be an employee who carried out Jefferies’ instructions to buy and later sell Carbide shares.

Giuliani said Boesky’s involvement in the GAF investigation was “indirect.” He said “Boesky cooperated and as a result of his cooperation we were able to develop a case on Jefferies. Jefferies cooperated and among other things he revealed this particular situation.”

After the indictment was announced, GAF’s stock dropped $1.375 to $45 in trading on the New York Stock Exchange. A spokesman asserted that the indictment will not affect management’s effort to take the company private through a leveraged buyout.

According to the indictment, GAF in October, 1986, contacted several investment bankers about selling its stake in Union Carbide. At the same time, the company allegedly contacted the Jefferies firm, asking the unnamed employees to have the firm buy Carbide stock to ensure that its price closed above a specified level for several days beginning at the end of that month.

The indictment said the brokerage followed this request, buying “large amounts” of Carbide stock. The sales allegedly resulted in a loss to the firm when it later resold the stock. GAF, meanwhile, arranged in early November, 1986, to sell 5 million Union Carbide shares to the Salomon Bros. investment firm at $23.125 per share.

Sherwin allegedly ordered that a GAF check for $40,000 be made out to Jefferies & Co. to compensate the firm for its loss on buying and selling the stock. According to the indictment, the payment was to be disguised as a fee for “investment banking advisory services.”

But the indictment says Sherwin ordered the check voided when a Wall Street Journal story on Nov. 17, 1986, disclosed that Boyd Jefferies had received a subpoena in the Boesky investigation.

An enforcement official at the Securities and Exchange Commission in Washington declined to say whether the SEC is conducting its own investigation of GAF.