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GAF case raises concerns about stock manipulation

``There is tremendous concern about the small investor having left the market,'' says Tamar Frankel, a professor of corporate and securities law at Boston University. ``This case may represent a signal, not just to corporate boards, but small investors.'' Professor Frankel is referring to the grand jury indictment earlier this month of GAF Corporation and one of its top officers for alleged stock manipulation.

Stock manipulation, Ms. Frankel and other experts point out, is in many respects far more serious than insider trading - where a corporate official may illegally profit from privileged information - since price manipulation goes to the heart of the entire stock market trading system.

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``The traditional thing that scares investors, particularly individual investors, is the possibility of stock market manipulation,'' says Thomas O'Hara, chairman of the National Association of Investors Corporation, a group representing small investor clubs. ``Insider trading is looked upon as bad conduct. But stock manipulation is considered especially serious, because it tars the whole market.''

The GAF case is already being seen as a potential legal blockbuster. The case represents the first time during the recent insider-trading process that an industrial corporation has been charged with fraud in the securities area.

While the indictment sends a strong signal to corporate board rooms that such illegal activities - although particularly difficult to prove - will not be tolerated by federal officials, it does represent a turnaround of sorts.

The United States Department of Justice and the Securities and Exchange Commission, legal experts say, have tended to shy away from such cases in recent years, given the legal complexities swirling around the knotty issue of criminal intent, one of the primary requirements in proving a pattern of stock market manipulation.

The case grew out of GAF's unsuccessful effort to take over Union Carbide in 1985 and '86. The 10-count criminal indictment charged that the company, GAF vice-chairman James Sherwin, and two company subsidiaries sought to deliberately manipulate the price of Union Carbide stock in such a way as to make illegal trading profits.

Manhattan US Attorney Rudolph Giuliani, who brought the indictment against GAF, charges that GAF conspired with Jefferies & Co., a brokerage firm. Boyd Jefferies, who pleaded guilty to securities fraud last year, is cooperating with federal prosecutors.

GAF and Mr. Sherwin deny the government's allegations.

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Unlike recent insider-trading cases, ``stock market manipulation cases are very difficult to prove,'' says Alan Bromberg, a professor of securities law at Southern Methodist University.

``The critical factor is intent,'' Mr. Bromberg says.

``Did a person or company,'' he asks, ``move stock prices up or down with the intent to create an artificial trading market designed for their own advantage and enrichment?''

Bromberg points out that federal anti-manipulation provisions have been in law - especially in Section IX of the Securities and Exchange Act of 1934 - for well over half a century. The government vigorously moved against companies accused of such manipulation in the early 1930s, following market excesses of the late 1920s.

Indeed, some suits were brought right up into the early 1970s, following a series of cases in the late 1950s and the '60s.

But according to Frankel, the legal climate changed during the mid-'70s. The Warren court became the Burger court, which concentrated on relieving the huge backlog of cases clogging the judicial dockets. For the Supreme Court and others in the federal court system, this meant looking at fewer corporate lawsuits that can sometimes continue for several years.

Frankel believes that some insider-trading cases ``are in fact market manipulation cases.''

Is the GAF case merely the tip of the iceberg, with more prosecutions perhaps yet to come?

Frankel says she doesn't know at this point, but adds that whenever there is a strong incentive to do something that results in large and quick profits - as has been a characteristic of the market during the recent takeover and merger climate - the possibility of other market manipulation situations cannot be discounted.

One tool that the government now has to identify such cases, as well as insider-trading cases in general, she says, is the use of the computer. There is now a clear and quick record that can pinpoint trading patterns - and profits.

Frankel does not believe that new legislation is required at this juncture to deal with market manipulation. Existing legislation, she says, should first be tested by the courts, as will in part occur as the GAF case goes forward.

Bromberg agrees, but he believes companies must establish careful legal review processes. ``Anytime you are in a stock buying or selling situation, there is the need for very, very careful coordination, at the highest levels of the company,'' he says.

One possible step, he says, would be to have one person in a company, presumably someone with a legal background, designated to oversee the buying or selling process.

Pursuing manipulation cases is important, says Mr. O'Hara.

``The biggest need for now is making the individual investor feel that he has a fair shake in the market,'' compared with the large institutional investors that now dominate Wall Street and stock trading, he says.

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