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DealBook: Jefferies Reports $39 Million Profit

December 20, 2011 by Leave a Comment

Jefferies has been whipsawed by investor fears over its European exposure.

The Jefferies Group reported a $39 million profit for the fourth quarter on Tuesday, as it grappled with choppy markets that have crimped once highly lucrative trading operations.

Jefferies’ earnings for the three months ended Nov. 30, which exclude some onetime accounting gains, amounts to 17 cents a share. Analysts, on average, had expected the bank to earn 14 cents a share, according to data from Bloomberg.

For the year, the firm earned $232 million, a slight improvement from the $224 million it earned last year.

The quarterly results were anxiously awaited by analysts and investors, hoping to scrutinize how well Jefferies had fared after weeks of pressure over its European sovereign debt holdings.

In recent months, the firm has been whipsawed by investor fears over its European exposure. The bank’s shares have tumbled nearly 20 percent since Oct. 31, when MF Global filed for bankruptcy protection after its outsize bets on European bonds prompted a run on that firm.

Eager to avoid becoming the next victim of a European scare, Jefferies detailed its sovereign holdings, then drastically cut its inventory of such debt to demonstrate the liquidity of its balance sheet. Top executives have also stridently battled purported rumormongers allegedly spreading lies about the firm’s financial position.

“We are proud of our 3,851 employee-partners who successfully navigated an extremely challenging fourth quarter that included continuing global volatility compounded by a November filled with a barrage of misinformation about Jefferies,” Richard B. Handler, the chief executive, said in a statement.

Analysts have praised Jefferies’ candor and risk management as signs of a firm both stronger and more careful than MF Global. But some of these same analysts have added that they were concerned that Jefferies might have taken those lessons a bit far, shedding too much risk to build up a safety cushion.

Jefferies “appears to be significantly deleveraging its balance sheet in addressing those concerns, which could further crimp profitability,” analysts at Bank of America Merrill Lynch wrote in a research note on Nov. 28.

In other respects, Jefferies is expected to foreshadow what lies ahead for its larger peers. While banks have said the fourth quarter reflected a rebound from a particularly ugly third quarter, both investment banking and trading businesses are expected to post only modest improvements.

Jefferies’ core trading business reported $286 million in revenue for the fourth quarter, down 25 percent from the period a year earlier, amid a continued slowdown in debt and equity trading. The drop was most noticeable in the firm’s principal transactions group, where revenue plunged 81 percent as Jefferies pulled back from its European sovereign bets.

The investment banking unit reported a drop of about 11 percent, to $261.3 million.

Article source: http://feeds.nytimes.com/click.phdo?i=bfc8c16a8e5da9cb2cf74559cda7ffed

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Citigroup to Pay $285 Million to Settle S.E.C. Complaint

October 19, 2011 by Leave a Comment

The S.E.C. also brought a civil action against a Citigroup employee who was responsible for structuring the transaction, and brought and settled another against the asset management unit of Credit Suisse and a Credit Suisse employee who also had responsibility for the derivative security.

The securities fraud complaint was similar to one the S.E.C. brought against Goldman Sachs last year, with one significant difference. Goldman Sachs was accused of misleading investors about who was picking the investments in a mortgage-related derivative.

It told investors that the bonds would be chosen by an independent manager, when in fact many of them were chosen by John A. Paulson, a hedge fund manager who chose assets that he believed were most likely to lose value, according to the S.E.C.’s complaint in that case. Goldman later settled the case by paying $550 million.

In the Citigroup case, however, it was the bank itself that chose assets for the portfolio that it then bet against. Investors were not told of its role or that Citigroup had an interest that was adverse to the interests of investors.

“The securities laws demand that investors receive more care and candor than Citigroup provided to these C.D.O. investors,” said Robert Khuzami, director of the S.E.C.’s division of enforcement. “Investors were not informed that Citigroup had decided to bet against them and had helped choose the assets that would determine who won or lost.”

The S.E.C. said the $285 million would be returned to investors in the deal, a collateralized debt obligation known as Class V Funding III. The commission said  Citigroup exercised significant influence over the selection of $500 million of assets in the deal’s portfolio.

Citigroup then took a short position against those mortgage-related assets, an investment in which Citigroup would profit if the assets declined in value. The company did not disclose to the investors to whom it sold the collateralized debt obligation that it had helped to select the assets or that it was betting against them.

In a statement, Citigroup said: “We are pleased to put this matter behind us and are focused on contributing to the economic recovery, serving our clients and growing responsibly. Since the crisis, we have bolstered our financial strength, overhauled the risk management function, significantly reduced risk on the balance sheet, and returned to the basics of banking.” The S.E.C. action named Brian Stoker, 40, a Citigroup employee who was primarily responsible for putting together the deal, and Samir H. Bhatt, 37, a Credit Suisse portfolio manager who was primarily responsible for the transaction. Credit Suisse served as the collateral manager for the C.D.O. transaction.

Mr. Stoker, who left Citigroup in 2008, is fighting the S.E.C. case, his lawyer said. Mr. Bhatt settled, agreeing to a six-month suspension from association with any investment adviser.

“There is no basis for the S.E.C. to blame Brian Stoker for these alleged disclosure violations,” said Fraser L. Hunter, a lawyer at WilmerHale representing Mr. Stoker. “He was not responsible for any alleged wrongdoing — he did not control or trade the position, did not prepare the disclosures and did not select the assets. We will vigorously defend this lawsuit.”

The derivative securities lost value remarkably fast. After the deal closed on Feb. 28, 2007, more than 80 percent of the portfolio was downgraded by credit-rating agencies in less than nine months. The security declared “an event of default” on Nov. 19, 2007, and investors eventually lost hundreds of millions of dollars, the S.E.C. said.

Citigroup received fees of $34 million for structuring and marketing the transaction and realized net profits of at least $126 million from its short position. The $285 million settlement includes $160 million in disgorgement plus $30 million in prejudgment interest and a $95 million penalty, all of which will be returned to investors.

The companies and individuals who settled in the case neither admitted nor denied the accusations in the complaint.

The settlement is subject to approval in the Federal District Court for the Southern District of New York, where the charges were filed.

Article source: http://feeds.nytimes.com/click.phdo?i=30b834eeab99536549766d2b37a1b66f

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You’re the Boss: Business-for-Sale Market Shows Improvement

July 8, 2011 by Leave a Comment

Transaction

Putting a price on business.

BizBuySell.com recently released its latest Insight Report on trends in the business-for-sale marketplace, showing an increase in closed transactions for the second quarter of 2011. While access to credit remains tight, the number of  deals completed was up 8 percent over the same period last year.

“We’ve been anticipating an upward trend in the business-for-sale market as more profitable businesses start to become available for sale,” said Mike Handelsman, group general manager, in a press release. Mr. Handelsman also attributed the uptick to business owners who were finally emerging from survival mode and returning to profitability. An industry breakdown of the 1,198 small businesses sold during the second quarter showed that almost half were in the service sector, while 26 percent were in retail, 18 percent were restaurants and 5 percent were in manufacturing.

The small-business economy continues to send mixed signals, with some saying that the recession has not ended on Main Street and with others reporting a surge of confidence among owners of privately held companies. Personally, my favorite economic indicator is the phone in my office, which has indeed started ringing more often with business owners calling to begin the process of a sale or exit. Many business owners have been asking me if now is a good time to sell, a question that I try to answer with as much candor as possible.

If you own a Main Street business — which I’ll define here as an owner-operated business with less than $2 million in annual gross revenue — things are still a bit hit and miss. If your business has performed well throughout the economic downturn (“flat is the new growth”) and is in a stable industry, there’s no reason not to take your business to market. Good businesses sell in any economy, and there are plenty of worthy buyers out there who have been looking hard for businesses to buy.

Businesses that are in the fortunate position of attracting interest from either a strategic acquirer or a private equity group are truly in a seller’s market. While Main Street America has muddled through the recession and uncertain recovery, larger companies and investors have been sitting on great gobs of cash — which they are actively looking to deploy. It used to be that I would only see interest from a private equity group on businesses with a minimum of $2 million in pre-tax earnings. Over the last two years that earnings floor has dropped to $1 million, as good deals have presumably been in short supply and the private equity folks look to do smaller “add-on” acquisitions of businesses that complement one of the larger companies in their portfolio.

Even if you’re on the fence as to whether now is a good time to sell, it is always a good time to start planning for what can be a lengthy and complex process. I’ve had a number of business owners approach me recently about building value in their businesses with an eye toward selling in the next year or two, a topic that I am more than happy to discuss. In fact, the phone ringing and the question of value enhancement are music to my ears.

Barbara Taylor is co-owner of a business brokerage, Synergy Business Services, in Bentonville, Ark. Here is her guide to selling a business.

Article source: http://feeds.nytimes.com/click.phdo?i=b9ce63c6be5976abf8ed7f7876706620

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