L.A. Broker Will Plead Guilty in Stock Probe : Boyd Jefferies Resigns From Firm He Founded; Charge Contends He Aided Speculator Boesky

NEW YORK —  In a case indicating that the government’s probe of Wall Street practices has significantly broadened, Boyd L. Jefferies, chairman and founder of the Los Angeles brokerage Jefferies & Co., resigned from the firm Thursday and said he will plead guilty to two federal felony counts.

One of the charges is related to illegal stock trades he executed with stock speculator Ivan F. Boesky.

Jefferies, 56, also consented to a Securities and Exchange Commission action barring him from the securities industry for at least five years. He is to place his 13% ownership of Jefferies Group, the parent firm of the brokerage, in a voting trust during that time. Sources close to the firm said it is “not terribly likely” that he will ever return to its management.

Accused of Aiding Boesky

The charges against Jefferies do not allege that he engaged in insider trading, although Boesky is at the center of the largest insider-trading ring ever exposed. Instead, Jefferies is accused of having helped Boesky engage in other illegal practices. These include Boesky’s concealing his investment positions in stocks of takeover targets by temporarily “parking” some of his stakes at other brokerages.

In its civil complaint, the SEC also charged that Jefferies assisted an unidentified client--apparently a member of a securities underwriting firm--in manipulating the price of a stock that was subject to a coming public offering.

Jefferies had his firm trade the stock so heavily that the firm accounted for 66% of the stock’s nationwide trading volume on the day before the offering, the SEC said. The stock’s price rose one-eighth of a point. Jefferies suffered a loss on the trades, the complaint said, but was reimbursed by the unidentified client, who is believed to face charges in the scheme.

The charges against Jefferies, whose firm specializes in handling large, difficult stock trades for institutional clients--among them such key players in the corporate takeover world as Carl C. Icahn, chairman of Trans World Airlines--represent a major expansion of the federal investigation into illicit practices on Wall Street. They also serve notice that some takeover practices considered widespread, though improper, on Wall Street, including “parking” stocks, will be treated as criminal violations.

“What you see in the SEC complaint is a series of situations that have not been criminalized in the past,” said Peter H. Morrison, Jefferies’ defense attorney. He indicated that Jefferies had fought the criminal charges on the grounds that they had not before been brought in connection with such practices, but “that wasn’t persuasive with the right people. They’re making a statement about what is acceptable in the securities business and what is not.”

One of the felony charges accuses Jefferies of “aiding and abetting” Boesky’s filing of false financial records with the government in connection with the “parking” scheme. The second one charges Jefferies with violating stock margin rules, which were technically breached when he bought stock for his unidentified client without taking payment for it.

Rules on Borrowing

Under federal law, an investor may borrow against--or “margin”--no more than 50% of a share’s value. In buying stock on his client’s instructions without arranging for payment, Jefferies, in effect, loaned the client 100%.

Sources said that the Jefferies case may also presage charges against a number of other major investment firms, including Drexel Burnham Lambert and the small but influential trading house of Jamie Securities, which are being investigated for possibly engaging in similar “parking” arrangements with Boesky.

The SEC on Nov. 14 announced that Boesky, then the nation’s most important speculator in takeover stocks, had settled insider-trading charges by paying $100 million in fines and penalties and agreeing to plead guilty to an unspecified felony. He has not yet entered that plea. It is understood that Boesky provided the SEC with key evidence against Jefferies, among other people.

Jefferies explained the charges to his employees Thursday from New York in a tearful cross-continent telephone address to the firm’s office staffs in New York and Los Angeles. His position as chief executive officer of the firm he founded 25 years ago will be assumed by Frank E. Baxter, who has been chief operating officer. The position of chairman will remain vacant for the time being, Baxter said.

‘Accept Responsibility’

In a statement, Jefferies said: “I fully accept sole responsibility for these transactions. I think it is appropriate that I suffer the consequences for my actions rather than the company.”

Jefferies further stated: “Let me add my voice to the growing number of people who are urging that the increasingly tragic results of trading irregularities . . . be used in a positive way to help improve and enhance our capital markets. Something went wrong in our value systems and it is vital that we all learn from my mistakes and those of others.”

Jefferies is to render his pleas at some date in the future, according to U.S. Atty. Rudolph W. Giuliani of Manhattan. Jefferies is understood to be cooperating with continuing investigations by the SEC and Giuliani’s office.

According to SEC documents, Jefferies’ arrangement with Boesky worked as follows: Jefferies agreed to purchase large quantities of stock from Boesky’s own brokerage, Seemala Corp., secretly agreeing to sell the shares back to Boesky at a later date. Seemala also agreed to compensate Jefferies for any market losses the firm might incur in the securities.

Secret Accumulation

This “parking” procedure is illegal to the extent that it allowed Boesky’s firm to secretly accumulate huge positions in companies while appearing to maintain the minimum financial net worth required by SEC standards. The net-worth standards would have been violated if Boesky had maintained all the stock positions on his own firm’s books. “Parking” also allowed Boesky to file misleading 13-D forms, on which owners of 5% or more of any corporation’s stock must disclose that to the SEC and the public.

In all, the SEC said, Boesky “parked” with Jefferies $56 million in the securities of three companies: G. D. Searle, Cooper Laboratories and Southland Financial. Jefferies also “parked” $47 million worth of securities with Boesky, the SEC said, largely so that his firm would not be overextended in holding the three stocks “parked” by Boesky.

Under their oral arrangement, the SEC added, Boesky was to receive all the market profits and cover all the losses incurred by Jefferies while the Jefferies firm held the securities.

Jefferies officials and SEC sources said Thursday that neither Jefferies nor the firm showed a significant financial benefit from the dealings. “The motivation was to accommodate a client,” one source said.

In its court filings, the SEC said Seemala Corp. on March 12, 1985, sold Jefferies 810,000 shares of Cooper Laboratories for $11.75 million. At the time, Cooper Laboratories was engaged in a takeover bid for Rorer Group. Seemala made two other sales to Jefferies on March 20, 1985, the SEC said, 600,000 shares of Southland Financial for $17.3 million, and 500,000 shares of G. D. Searle for $27.1 million.

At the time, Southland, a Dallas insurance and financial-services company, was the subject of intense takeover speculation. Searle was the subject of talks through which the controlling Searle family was planning to divest itself of its holdings.

Oral Agreement

The SEC contended that Boesky had an oral agreement with Jefferies to repurchase all three stocks, generally about 31 days after the initial transactions.

The Searle transaction led directly to the exposure of the scheme. Within a week after Jefferies’ purchase, the price of Searle stock dropped by $7 a share--a loss to Jefferies of more than $3.6 million.

To offset most of the loss, Jefferies had an employee contrive a false invoice for $3 million to cover “advisory and corporate finance services” and deliver it to Boesky. The invoice proved to be important documentary evidence for the SEC.

The charge of violating margin rules stems from a 1986 deal in which Jefferies allegedly agreed to heavily trade the shares of an unidentified company one day before its parent corporation made a public offering of stock in that unit. The purpose was to raise the share price of the subsidiary to gain a better market price for the new offering.

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