Don’t blame the messenger, Jefferies

By Rob Cox
November 3, 2014

By Rob Cox

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. 

In the weeks before Lehman Brothers went bust, Chief Executive Richard Fuld had taken to blaming the short-sellers betting against his stock and captured agents in the media for the tribulations facing his investment bank. As Jefferies, another Wall Street firm, redirects culpability for its troubles, it feels somehow appropriate to recall Fuld’s blame-the-messenger mentality in the Lehman bunker.

With $45 billion of assets, Jefferies is a tiddler compared to $600 billion Lehman. That doesn’t mean, however, that the aggressive Wall Street up-and-comer run by Richard Handler can’t learn from the mistakes of its predecessors.

In a week that recalled the securities industry’s harder-core 1980s era, Wall Street was titillated by a series of salacious charges made against a senior Jefferies rainmaker, Sage Kelly, in a $7 million civil lawsuit filed by his estranged wife. The allegations contained in a New York court document include rampant abuse of alcohol, cocaine, mushrooms, heroin, Molly and ecstasy; solicitation of prostitutes; defecating and urinating in the bedroom; and perjury.

Such accusations, originating from a personal matter like child custody, would be embarrassing for anyone. In this case, Kelly, who last week took a leave of absence from running the healthcare practice at Jefferies, wasn’t the firm’s only executive implicated in the lawsuit. In her complaint, Christina Kelly called out more than a dozen other business associates, including the firm’s chief investment banker, Ben Lorello, labeling them the “Defendant’s Drug Cohorts.”

Back before the internet, the world’s most viral source of information was arguably the Wall Street trading floor. And nothing whipped around with the velocity of an indecent joke. In a business that is based on trust, this sort of chatter can be dangerous, as trading partners and clients fret about any sort of guilt by association, or worse. Jefferies, no stranger to this phenomenon, found itself on the losing end of that trade this week.

In response, Handler put out a statement on Friday. It’s a tactic that worked for him nearly three years ago to the day, when rumors about his bank’s positions in plunging European credit markets stoked fears it might follow MF Global into bankruptcy. “These are fragile times in the financial market and we decided the only way to conclusively dispel rumors, misinformation and misplaced concerns is with unprecedented transparency about internal information that is rarely, if ever, publicly disclosed,” Handler told the New York Times then.

This time, Jefferies’ financial strength is not in question. Far from it, in fact. The firm is now part of Leucadia National, a diversified investment company with a market value of $8.6 billion. Its shares, incidentally, increased 3 percent last week. Rather, at stake is the personal integrity of an important banker, and some of his colleagues. Sending out a statement of support, even a denial, would be understandable in the circumstances.

Handler, however, entered a Shakespearean realm and doth protest too much. In a 1,000-word statement titled “Culture and Character,” Handler and the chairman of the firm’s executive committee, Brian Friedman, said rather than calling in the lawyers, they would submit to drug tests. They also asked those named in the suit if they’d be willing to do the same. Everyone joined in, including healthcare bankers not named in the court proceedings.

“The two of us can of course attest that all tests came back drug-free,” wrote Handler and Friedman. “Sometimes truth does come in a jar,” they wrote, effectively putting the urine test on something of a par with a credit agency rating. Set aside the ease with which such tests can be passed. Even the rarefied liquid waste from Wall Street can’t determine drug use of three to five years ago, when the alleged events took place. Anyone intimately familiar with the healthcare industry surely knows that.

The duo go on to spend a quarter of their missive attacking the press for reporting on the matter, egged on by competitors, dredging up “old news” and ignoring the work employees at Jefferies do for clients because “good news does not sell newspapers.” This, too, recalls Handler’s counter-attack on Sean Egan, the head of the Egan-Jones credit rating agency, which in 2011 questioned Jefferies’ European exposure and the bank’s sustainability.

In the end, Egan was wrong in his analysis. Likewise, the accusations made against Kelly may prove unfounded in the end. Fuld’s tale nevertheless remains a cautionary one. Behind the billowing smoke is often fire. Clients, employees and shareholders of Jefferies would be best served by a firm that points its hoses in the right direction.

One comment

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OK, so testing for drug from 3-5 years ago can’t be ascertained, fair enough. That said, I believe those who used drugs three years ago fairly likely to continue and thus, if everybody submitted themselves for testing and the results were all negative, then doth protest too much ‘is’ called for.

On the flip side, I suppose wondering if claims by an estranged wife seeking to benefit by beating her ex into submission via the court and public opinion don’t merit close examination by the press. How sad such her allegations are also impossible to disprove.

Leaves one to wonder, eh? Too bad this is circulating in public.

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