More about the Case of James T. Sherwin, Convicted Stock Market Manipulator

In view of the numerous letters and questions I have received about this case, I went down to the United States District Court for the Southern District of New York and obtained the complete docket sheet of the case of United States v. GAF Corporation and James T. Sherwin, 88 Crim. 415. This docket sheet is 20 pages long and cost me $10. As a result, I have been able thoroughly to research this case. Here is a summary of what I found:

There are two published decisions in the law books: US v. GAF Corp., 884 F.2d 670 (2d Cir. 1989) and US v. GAF Corp., 928 F.2d 1253 (2d Cir. 1991).

The case was filed on July 7, 1988. There were three trials. The first was declared a mistrial. The second resulted in a hung jury after 12 days of deliberation. The third resulted in Sherwin being convicted, sentenced to 6 months in prison and to pay a fine of three hundred dollars on May 25, 1990.

Sherwin appealed. His conviction was reversed by a 2-1 decision.

On remand, the government nolle processed the case. The government admitted that it could not obtain a valid conviction. The case was dismissed on August 9, 1991.

Therefore, Sherwin is not a convicted felon.

The case arose in the aftermath of a failed attempt by GAF Corp. to take over Union Carbide Corp. In this failed takeover attempt, GAF Corp. had acquired nearly 10% of the stock of Union Carbide. This and other takeovers are the subject of my book, "How to Take Over an American Public Company" by Samuel H. Sloan (Orsden Press, 1992).

After failing in its attempt to take over Union Carbide, James T. Sherwin, who is an International Chess Master and who was Vice-Chairman of GAF Corp., wanted to sell the 10% stake in Union Carbide Corp. at a favorable price. Sherwin contacted several dealers in Union Carbide stock and solicited bids for the block. Most of the bids were at a fraction below the prevailing market price for Union Carbide on the New York Stock Exchange.

The government charged that Sherwin then contacted Boyd Jefferies, founder of the Los Angeles brokerage firm of Jefferies and Company, and asked him to see to it that Union Carbide closed at a price of "22 or better".

On October 29, 1986, Union Carbide traded for at most of the day at 21 7/8. Near the close of trading, James Melton, chief trader at Jeffries & Co., entered an order to buy 140,000 shares on the New York Stock Exchange. All available stock was purchased at 21 7/8 and the remainder was purchased at 22. The stock closed at 22 that day.

The next day, October 30, 1986, another buy order was placed near the close at around 22. The stock closed at 22 3/8 that day.

Early the following week, the stock Jefferies had bought on October 29 and 30 was sold in the mid 21 1/2 range, and Jeffries suffered a loss thereby.

On November 6 and 7, Jefferies bought more Union Carbide stock. By that time, the stock was trading at a higher level and these purchases were in the 23 range, with the stock closing at 23 or better on those days.

Initially, the government charged that all the trades from October 29 through November 10 by Jefferies were part of a manipulative scheme by Sherwin to artificially raise the price of Union Carbide stock. However, after the first two trials, it became apparent that Sherwin and GAF Corp. had nothing to do with the November 6 and 7 trades in the 23 range and that Jefferies had manipulated the stock on those days at his own initiative and for his own reasons. As a result, during the third trial, the government dropped that aspect of the case and focused entirely on the October 29 and 30 trades.

Sherwin, in defense, sought to show to the jury the government's bills of particulars for comparison, in order to demonstrate to the jury that the government had changed its theory of the case and initially had sought to prove beyond reasonable doubt one thing and then decided to prove beyond reasonable doubt something entirely different. Sherwin was clearly entitled to show to the jury that the government's case had shifted. However, the judge would not allow the jury to receive this information.

This refusal to allow the jury to learn the true facts of this case formed the primary basis for Sherwin's successful appeal. The appellate court ruled that Sherwin had been entitled to show the bills of particulars to the jury. The court reversed and remanded for further proceedings.

There were no further proceedings because the government's entire case and the only evidence linking Sherwin to the trades of October 29 and October 30, 1986 was the testimony of James Melton that he had called Sherwin three times on those dates to notify him of the trades, although on one occasion Sherwin had been out. Sherwin denied receiving any of these three calls.

Melton testified that he had made these calls on a WATS line, which was a type of private leased line, and that the telephone company did not keep a record of these calls.

However, near the conclusion of the third trial, the defense discovered that the telephone company does keep a record of such calls. The records were subpoenaed and it was discovered that the telephone company had no record of any such calls having been made.

Thus, the only evidence linking Sherwin to the "crime" was proven to be false. The government therefore had no evidence with which to proceed to a fourth trial.

This case is truly exceptionable in that the entire case against Sherwin turned on the question of whether the stock of Union Carbide Corp. would have closed at 21 7/8 or at 22 on October 29, 1986. It happens hundreds of times every day that somebody enters a transaction for the purpose of affecting the closing price of a stock listed on an exchange. I have changed the closing price of a stock many times. I am sure that almost everybody else in the market has done it at one time or another as well. There are many possible reasons for doing this, such as to avoid a margin call or to trigger a technical benchmark or any one of a thousand other reasons.

To convict a person and sentence him to prison for doing this is incredible, especially where, as here, there was no de minimis effect. The block of Union Carbide stock which GAF Corp. owned was not sold at this time. The court's decision does not state when it was sold, except that it is apparent that it must have been sold no earlier than November 10, by which time the closing price on October 29, 1986 was irrelevant.

I can understand how if, for example, Sherwin had somehow manipulated the price of Union Carbide stock up to say 25, and then made a public distribution of the stock at 24 3/4, whereas free market forces would otherwise have kept the stock at 21 7/8, that under those facts there might have been a criminal charge.

However, even under those facts, the truth of the matter is that it is standard practice that any time a secondary offering of stock comes out, the managing broker tries to get the stock price up so as to make a sale at a higher price. Everybody in the market knows this. If everybody who did this were to be criminally prosecuted, all the major stock brokerage firms would be shut down and there would be nobody left to buy and sell stock.

The Unite States Department of Justice spent over a million dollars in prosecuting this case. GAF Corp. and Sherwin spent over a million in defense. Yet, it was only at the conclusion of the third trial that a simple thing was discovered that the AT&T telephone records proved that the calls which were the linchpin to the government's case had never occurred.

By this time, Sherwin's reputation was irreparably destroyed. He went to live in exile in Switzerland. Sherwin has never been able to work as a top executive in an American Public Company again.

The United States Attorney who prosecuted Sherwin was Rudi Giuliani. Giuliani is now the Mayor of New York City.

Sherwin still plays chess occasionally.

Sam Sloan

PS The decisions of the courts use both the names Jefferies and Jeffries. I do not know which spelling is correct, or perhaps both are correct.

Here is:
Contact address - please send e-mail to the following address: