Jefferies Blames Woes on Lies, Rumors and Hedge Funds

NEW YORK ( TheStreet) - As Jefferies ( JEF) shares sank to near three-year lows Monday, the firm is trying to stop the bleeding and lay blame for its suffering on the doorstep of Wall Street.

Jefferies chief executive Rich Handler released a six-page letter to address markets "being misled by half-truths, false rumors and lies being disseminated with malice by a group whose interests are absolutely opposed to yours and ours," citing unnamed hedge funds behind the trouble.

Fears about Jefferies capital and liquidity surfaced after MF Global filed for bankruptcy on Oct. 31 as a result of a misplaced $6.3 billion bet on European sovereign debt. In November, ratings firm Egan Jones questioned whether Jefferies had a similarly perilous European exposure. Today's letter shows the bank cut its gross exposure to European peripheral debt by 50%.

Shares of the firm of tumbled 70% year-to-date and its shares fell below $10, near their lowest levels since March 2009.

The letter, co-signed by chairman of the executive committee Brian Friedman, stressed that Jefferies survived the financial crisis without bailouts and raised capital opportunistically ahead of the crisis, while it also addressed confidence in the investment bank's long term capital and its funding sources.

Of the crisis, Handler wrote, "Seeing events unfold, Jefferies acted in April 2008, raising $430 million of equity as a buffer against the ongoing crisis... As a result of these and earlier capital raises, as well as ongoing retained earnings, Jefferies maintains a liquid balance sheet supported by over $8.2 billion of long-term capital." Among that capital, $4.3 billion is from long-term debt that the New York based bank has raised, $3.5 billion from shareholder equity and another $438 million from preferred shares sold in 2008.

About the bank's funding of its daily operations, also known as liquidity, Handler wrote, "we do not use or rely on "wholesale funding," a catch-all term typically used to refer to funding other than core deposits, such as brokered deposits, foreign deposits or commercial paper."

The chief executive nominated in 2000 made clear that unlike investment banks Lehman Brothers and Bear Stearns, who revolved billions in overnight loans and came into crisis when lenders withdrew from them, Jefferies doesn't borrow unsecured funds overnight and has only $255 million of long-term in debt maturing in 2012. Handler wrote, "As of the close of business Friday, Jefferies had in excess of $2.2 billion in cash on hand, nearly $1 billion of unpledged quality collateral and $1.7 billion undrawn under our $1.95 billion total lines of credit."

As of early trading, the letter seems to have stabilized shares. After falling more than 4% in early trading to $9.60, Jefferies erased earlier losses and now are up over 2% to $10.40 in early trading. Meanwhile, the KBW Bank Index ( BKX) is down nearly 3% to $36.50.

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In its most recent quarter ended in August, Jefferies earned $68.3 million in profits, a slowing on earnings from earlier quarters in the year and from levels at this time in 2010. About Jefferies's fourth quarter ending in November, Handler wrote that the bank "expect s to record operating results for our fourth quarter that, although not where we want them to be, will be profitable and stronger than our third quarter." The investment bank has come out of the crisis on track to earn over $200 million in annual profits after posting a 2008 loss of $540 million.

Acknowledging some of the rumors that have surfaced about Jefferies since MF Global's demise Handler wrote, "Throughout the month of November, Jefferies has been barraged by a group of people maliciously spreading rumors, half-truths and outright lies through every means possible." To cut against such speculation, Handler stressed that Jefferies has no CDS exposure to an escalating crisis in the European periphery and actually has a net short of $134 million in its exposure to Greece, Ireland, Italy, Portugal and Spain after cutting gross exposure by 50%, or 4% of its total equity. "By now, everyone should recognize Jefferies is the firm with the least exposure to the sovereign debt of Greece, Ireland, Italy, Portugal and Spain of all of our major competitors," wrote Handler.

-- Written by Antoine Gara in New York.

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