Jefferies Stock Rout Lops $249 Million From Handler’s Stake

Handler's 'Greap Leap' Tested
The logo of Jefferies Group Inc. is seen in the entryway of their offices in Houston. Photographer: F. Carter Smith/Bloomberg

Jefferies Group Inc.’s 62 percent stock-market swoon is more than just business for Chairman and Chief Executive Officer Richard Handler -- it’s personal.

The value of Handler’s stake has plunged by $248.7 million this year, including $38.7 million in November alone after MF Global Holdings Ltd. collapsed. What’s more, Handler hasn’t had an employment contract as a safety net in the 21 years he’s worked at New York-based Jefferies.

Handler, 50, focused this month on dispelling speculation that a liquidity crunch and losses on European debt will sink his firm, too. In a Nov. 21 letter to stakeholders, he branded those ideas “malicious lies” spread by people “whose interests are absolutely opposed to yours and ours.” Handler’s interests, besides his job, include 12.1 million shares, making him the biggest individual owner.

“Handler is a quite unusual bird,” Frank Glassner, CEO of Veritas Executive Compensation Consultants in San Francisco, said in a phone interview. “He clearly communicates a message that he’s in it for the long term and in it with shareholders as well. It’s a great leap forward in faith on his part not to have an executive contract.”

The Jefferies CEO owns a bigger share of his company than CEOs at the biggest Wall Street banks, with a 6 percent stake that dwarfs the 0.43 percent Lloyd Blankfein holds in Goldman Sachs Group Inc. and the 0.05 percent of Morgan Stanley’s James Gorman, according to data compiled by Bloomberg.

Restricted Stock

Handler finished 2010 with almost 13.9 million shares, including restricted stock, valued at $370.1 million at year-end when Jefferies traded at $26.63, according to regulatory filings and Bloomberg data. Handler’s current stake is valued at about $121.4 million based on yesterday’s $10.06 closing price, the lowest since March 2009.

Employment contracts and “golden parachutes” aren’t typically offered to senior executives, according to Jefferies. “We believe our severance, change-in-control and pension benefits are quite modest compared to general business practices for companies of comparable size and character,” Jefferies said in a March regulatory filing. “We have considered this fact in setting the levels of total direct compensation.”

Under a policy that limits severance to six months’ pay, Handler would get $500,000 if he’s fired without cause, according to the filing. If he’s dismissed involuntarily after a change in control, $21.2 million in restricted stock units that he’s already earned would vest immediately.

Repelling an Assault

Jefferies has plunged 21 percent since MF Global’s Oct. 31 bankruptcy, triggered by former CEO Jon Corzine’s $6.3 billion bet on the bonds of Europe’s most-troubled nations. Handler has defended his firm since, as it has come under pressure from short sellers and a credit downgrade by Egan-Jones Ratings Co. Jefferies issued seven statements on its European holdings and cut its position by about three-quarters as of Nov. 21.

Handler took the lead in repelling what he called an assault on his company as inquiries flooded in from investors and analysts. The CEO personally sent and revised e-mails to the news media as he sought to break the stock’s slide and convey what his six-page letter called “the reality of what is happening at Jefferies.”

He wrote that the firm struggled about whether to discuss what Handler called even more remote rumors including “sadly some that are rather personal and, as with all the others, utterly and totally false.” In an interview with the New York Times, Handler said he debated whether to write the Nov. 21 letter and that he thought it was too long and emotional.

‘Staying in Front’

“He’s being a good CEO in staying in front of the story,” said Tim White, a managing partner at Dallas-based executive search firm Kaye/Bassman International Corp. “When CEOs own a big piece of a company, then they’re going to act in the interest of shareholders more stridently than they might if they didn’t own a big piece of it.”

The campaign impressed Chris Kotowski, an Oppenheimer & Co. analyst, who said he found Handler’s letter convincing. In a note to investors today titled “Another Hack Attack,” he called parts of an updated Egan-Jones’s analysis “flat-out wrong by a country mile.”

According to a Nov. 22 Egan-Jones report, revenue has fallen 37.8 percent annually “over the last couple of years.” Kotowski said Egan-Jones also “bizarrely projects” that Jefferies’s total assets would increase from $45 billion as of Aug. 31 to about $67 billion at fiscal year-end and $102.2 billion in November 2012.

‘Grotesquely Wrong’

“Try as we might, we could not reverse engineer a 37.8 percent decline rate to figure out what the ‘couple of years’ time-frame was,” wrote Kotowski, who has a “market perform” recommendation on Jefferies shares. “Every analyst is entitled to his or her opinion, but we doubt that the market will pay much heed given the gross miscalculations we see in this report.”

Jefferies rose 4.5 percent to $10.51 at 4:15 p.m. in New York after falling 1.4 percent to $10.06 yesterday. Egan-Jones stands by its report, President Sean Egan said in an e-mail. Gimme Credit, the research firm specializing in bonds, upgraded Jefferies today to “buy.”

Handler bought 170,948 shares this year for $2.98 million, a stake valued at $1.72 million based on yesterday’s close. On Sept. 22, he sold 2 million shares for $12.58 each to Leucadia National Corp., Jefferies’s biggest owner with a 29 percent stake. In a memo to employees, Handler said the sale was tied to the vesting of stock awards that required “significant tax payments in cash.” Handler had never before sold Jefferies shares except for charitable donations, according to a filing.

Richard Khaleel, a spokesman for Jefferies, declined to comment on Handler’s stake beyond what the firm has reported in regulatory filings.

High-Yield Finance

Handler received a bachelor’s degree in economics from the University of Rochester in 1983 and a master’s in business administration from Stanford University in 1987. He joined the company in 1990, when junk-bond powerhouse Drexel Burnham Lambert Inc. filed for bankruptcy and Jefferies hired 60 of its bankers to expand high-yield finance.

In his first year at the investment bank, Handler co-founded the high-yield capital markets group and was a managing director of the unit from May 1993 until February 2000. He became CEO in 2001, when Jefferies had $3.96 billion in assets and about 1,000 employees, and was named chairman a year later. He has since expanded the balance sheet to $45.1 billion and posted profits for the past 11 quarters.

Handler has almost quadrupled the staff as CEO, hiring dealmakers and traders from the world’s biggest investment banks, including Goldman Sachs, Credit Suisse Group AG, Citigroup Inc. and Barclays Plc.

His compensation for the 11 months ended November 2010 climbed 17 percent from all of the previous year to $15.2 million, including $917,000 in salary, a $1.25 million cash bonus and $13 million in restricted stock units linked to performance, according to the March filing. Last year, Jefferies changed its fiscal year-end to Nov. 30 from Dec. 31.

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