Jefferies CEO Claims Bank Was ‘Defrauded’ By Bankrupt Auto Supplier First Brands Group

Jefferies Financial Group (JEF) CEO Rich Handler said that the bank was “defrauded” by the auto supplier First Brands Group, which went bankrupt in late September after its creditors opened probes amid concerns over potential financial irregularities.

Shares of Jefferies were up nearly 4% in afternoon trading. The stock had closed down 11% on Thursday.

“So, I'll just say this is us personally, we believe we were defrauded, okay, from a company. I personally talk to a lot of investors, a lot of CEOs, a lot of operating businesses. I think the environment is generally pretty darn good. I don't see this as the canary in the coal mine,” Handler said, according to a filing by Jefferies on Friday.

“I'm not saying there aren't other issues like this. There was one yesterday that one of our competitors had to deal with. I think these things happen,” he added.

Western Alliance (WAL) disclosed on Thursday that a borrower failed to provide first-position collateral loans, triggering fraud concerns and adding volatility to the markets, with shares of U.S. regional banks slumping.

Earlier in the week, Jefferies said that its estimated financial losses from the bankruptcy of First Brands were relatively low. Jefferies’ investments in the troubled auto parts firms effectively comprise $43 million, or 5.9%, of Point Bonita’s accounts receivable purchased from First Brands and a small interest in First Brands’ bank loans through Jefferies Finance’s Apex platform.

On October 8, Jefferies said that its Leucadia Asset Management fund, through its credit fund Point Bonita, has about $715 million invested in receivables tied to First Bank.

Retail sentiment on Jefferies improved to ‘neutral’ from ‘bearish’ territory compared to a day ago, with message volumes at ‘extremely high’ levels, according to data from Stocktwits.

The disclosure from Western Alliance followed Zions Bancorp’s (ZION) announcement on Wednesday about a $50 million charge-off related to commercial and industrial loans.

Despite this, Handler noted that it did not feel like the sector was on the edge of a default cycle. “I've been on the edge of default cycles before. I think that's one of the reasons why our business is doing so well right now. Private equity is flush with capital and they have to basically sell companies. Corporates feel pretty strong, so they're actually being acquisitive. And there's a functioning liquid debt and equity market right now,” he said.

“And certain parts of the world are better than other parts of the world. But it doesn't feel like, you know, 2007 when the world's about to come to an end. Look at the financial sector. The financial sector across the board is usually the canary in the coal mine … So, I don't see it as the beginning of the end,” Handler added.

Shares of Jefferies have declined nearly 35% this year.

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