Jefferies Responds to 'Lies and False Rumors' in Letter

Jefferies Group Inc publicly responded to what it called ``malicious lies and false rumors'' about its operations with an aggressive six-page letter, its latest salvo in a weeks-long battle to restore confidence in its funding and profitability.

The investment bank said it expects to turn in a profitable fourth quarter that is ``stronger'' than the previous period, excluding costs related to its purchase of Prudential Bache.

It also provided more information about its holdings of European sovereign debt, saying it has reduced gross exposure to Greece, Ireland, Italy, Portugal and Spain by 75 percent and now has a $134 million net short position to those countries' sovereign bonds. That represents about 3.8 percent of shareholders' equity, Jefferies said.

``We are writing so that every one of our key constituencies receive the facts and reality directly from us, instead of 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,'' Chief Executive Richard Handler and Brian Friedman, chairman of the executive committee, said in the letter.

As investors digested Jefferies' letter, its shares briefly turned positive from earlier losses of more than 5 percent. In recent trading, the stock was down 0.2 percent at $10.14.

Jefferies shares have been brutalized in the aftermath of MF Global Holdings Ltd's bankruptcy on Oct. 31, as investors worried that Jefferies might have similar troubles. The bond-rating agency Egan Jones downgraded Jefferies on Nov. 2, arguing that the bank is also too highly leveraged with a heavy reliance on short-term debt.

Jefferies shares are down more than 20 percent since MF Global's bankruptcy, compared with a 12 percent drop for the NYSE Arca Securities Broker/Dealer Index , which includes Jefferies and competitors like Goldman Sachs Group Inc , Morgan Stanley and Raymond James Financial Inc .

MF Global's downfall came from big bets on troubled European debt combined with a heavy reliance on short-term funding. Jefferies executives have tried hard to distance the firm from its felled competitor, even taking the unusual step of publicly disclosing the CUSIP numbers of all the European bonds it holds.

But after brief respites from investor pressure after each statement, a new worry cropped up in the market.

Among the latest concerns addressed in the letter on Monday, Jefferies executives said the bank had not sold its European debt to an affiliate and was under no obligation to repurchase the bonds at a later date.

They also said that clients have not been fleeing Jefferies' prime brokerage business and that there has been no ''undisclosed major loss'' at its partnership with Leucadia National Corp .

Executives also tried to cast doubt on Egan Jones, pointing out omissions and errors in an analyst's statements about the company's sovereign debt exposure and its leverage ratio. Egan Jones has stood by its downgrade.

Jefferies officials have blamed short-sellers for spreading what they call unfounded rumors about its operations in recent weeks, hoping to profit from declines in its stock and bond values. The bank has repurchased $50 million worth of 2012 bonds in the past few weeks as prices declined.

In the letter, Handler and Friedman said Jefferies received a letter from a hedge fund with several questions that they said seemed to be ``an intentional misreading of our public filings'' to support rumors that they believe the hedge fund has been spreading.

``All these folks seem to be trying to take advantage of the MF Global bankruptcy and the volatile market environment with a view to harming Jefferies and all of us, presumably for personal gain,'' they said. (Reporting by Lauren Tara LaCapra in New York, editing by Dave Zimmerman)