The attack on Jefferies Group, Inc. (NYSE: JEF) is unfortunately reminiscent of larger implosions of firms formerly named Lehman and Bear Stearns.  It almost does not seem to matter what Jefferies management says or what factual data is released by the company to defend itself.  Selling is only followed by more selling.  After the latest debacle at MF Global, it seems that no one will come to the rescue or to the firm’s defense in case the most extreme of circumstances turns out to be even remotely true.

Jefferies has taken more aggressive steps to thwart the negative news flow than other firms have, but so far it seems that all “facts” are being taken as fiction.  Management has now released detailed data yet again outlining its exposure to weak spots in Europe to try to thwart the efforts of a short selling group.  This starts out “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…”  The firm tries to address every concern out there in that letter.

Jefferies is buying their own paper when and where it can: “As an aside, we note that we repurchased $50 million of our 2012 bonds in the past few weeks and over time, as part of our announced 20 million share-buyback program, about 5 million shares of Jefferies common stock in the open market.”

Regulators make brokers, traders, fiduciaries, and managers record and store instant messages, phone calls, and instant messengers for a reason and that reason is presumably not to just keep these firms buying up more and more data space in storage farms.  If everything that Jefferies is putting out is true, shouldn’t Jefferies be out suing the malicious group(s) AND demanding that regulators conduct an instant crackdown by skimming every instant message, email, and phone call that revolves around every short sale in Jefferies?

Short selling in general is not a bad thing.  Still, it is one aspect of the market that many investors consider a dirty trick or a shell game, but it has many positive effects as far as the overall market is concerned.  The problem is when short sellers attack and then get to become activists against a company.  Disseminate bad information to keep pushing a bet against a company is one thing, but if it is proven to be false and malicious it crosses the line.  At some point, the definition of freedom of speech becomes no different from yelling “Fire!” in a crowded theater.

Jefferies was down 2% and more a while ago and shares are currently down 0.2% at $10.14.  The stock hit a low of $9.60 earlier today and the 52-week trading range is $9.50 to $27.12.

It seems unreasonable that any of the large trading houses would demand that clients who want to hold Jefferies shares make the designation that their shares cannot be borrowed and also demand that the Jefferies shares not be held in “Street Name” as most shares are.  That might act as a buffer to prevent short selling a bit more, and perhaps Jefferies could try to make it more expensive to borrow the stock.  We were told by one trader that the cost is 275 basis points for a borrow, which is no barrier to shorting the stock if someone with deep pockets believes that an implosion or close to it is further heading toward Jefferies.

Jefferies was above $16.00 in August and shares were again under $10.00 earlier today.  We will ask this pointed question, but it is assuming that Jefferies is not selectively eliminating all of the bad things that it is being accused of… If regulators cannot prevent an unwarranted ‘run on the bank’ in the midst of this regulatory climate, what good does it do to just step in with red flags after the fact?

JON C. OGG

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