The embarrassing slip-up in proprietary trading that Jefferies Group ( JEF) disclosed on Monday came as the New York-based boutique broker run by CEO Rich Handler is seeking to challenge the dominance of its much larger rivals.

Jefferies rang up $51 million in losses from trading and asset management that got upended by a dicey trading and credit environment that already has unsettled the likes of Morgan Stanley ( MS), Lehman Brothers ( LEH) and Bear Stearns ( BSC). The firm is expected to report fourth-quarter results Jan. 23.

For the fourth quarter of last year, the New York-based company expects to report a net loss of $24 million , or 17 cents a share. Sales at the firm will be in the range of $345 million to $365 million.

The loss is particularly vexing for Jefferies, which only recently had been driving hard at building up its proprietary trading operation to leverage its expertise in small- to mid-cap companies and vying for market share in those areas largely ignored by Morgan Stanley and Goldman Sachs ( GS).

Jefferies' Handler said the firm lost a combined $32 million in two principal trading groups. "They got caught up in the meltdown and the money was gone," said Handler, during the analyst call.

Most embarrassing is that those proprietary trading strategies were kicked off in July. Proprietary trading at investment banks and brokers is an area that is meant to generate profits for the firm by using its own money and savvy to benefit from trading opportunities. For midtier firms like Jefferies, such strategies were significant, because fees from other business lines had been thinning out.

"We're fully on the offensive in building this business," Jeffries co-head of equities Ross Stevens told Bloomberg during an interview in October. The statement came after the firm's most recent trader and salesperson hiring binges to boost its principal trading, which included the hiring of Rhys Brooks, co-head of cash trading at Thomas Weisel Partners Group.

According to people familiar with the situation, Stevens, who was hired in November 2005 and charged with, among other tasks, growing the firm's principal trading platform, could be shifting to a new role with the firm. Jason Griffiths, who had been co-head of equities along with Stevens, has been named sole head, according to the source.

Rumors had floated that Stevens, who has a Ph.D from the University of Chicago, may have left the firm as a result of its unexpected fourth-quarter losses. It is now believed, however, he will be repositioned to focus on quantitative strategies. Messages left with Stevens and Griffith were not returned.

"We wanted to have a singular voice in that department and wanted to be sure that the execution focus was heightened," said Brian Friedman, chairman of Jeffries' executive committee, speaking generally about management moves without naming names during its Monday call.

A spokesman for Jefferies declined to comment.