UPDATE 4-Jefferies further cuts Euro sovereign debt holdings

Mon Nov 21, 2011 5:18pm EST

* Jefferies has cut Euro debt exposure by another 50 pct

* Bank responds to "malicious lies and false rumors"

* Shares close up 0.4 percent

By Lauren Tara LaCapra

Nov 21 (Reuters) - Jefferies Group Inc said it has reduced its exposure to troubled European sovereign debt by another 50 percent, part of the investment bank's effort to restore investor confidence following MF Global Holdings Ltd's bankruptcy.

In a public letter on Monday, top Jefferies executives said the company has reduced gross exposure to debt of Greece, Ireland, Italy, Portugal and Spain by a total of nearly 75 percent since worries first surfaced in early November.

The bank now has a net short position of $134 million to those countries' bonds, meaning Jefferies will profit as bond values deteriorate. The exposure represents about 3.8 percent of shareholders' equity, they said.

"By now, everyone should recognize Jefferies is the firm with the least exposure to the sovereign debt of Greece, Ireland, Italy, Portugal and Spain of all of our major competitors," Jefferies said in a letter signed by Chief Executive Richard Handler and Brian Friedman, chairman of the executive committee.

The six-page letter represents Jefferies' latest salvo in a weeks-long battle to restore confidence in its funding and profitability.

The executives said they are responding to "malicious lies and false rumors" that have been spread about its operations by investors seeking to profit from a decline in its share price.

Jefferies has received a letter from a hedge fund that asked several questions that seemed to show "an intentional misreading of our public filings," Handler and Friedman said, to support rumors that they believe the hedge fund has been spreading.

In an interview, Friedman declined to name the hedge fund, but said its message was symptomatic of broader rumor mongering across Wall Street regarding Jefferies' financial health. The company issued its letter to combat those misperceptions, he said, and will continue to defend itself as necessary.

"My sense is that everyone is supportive and recognizing that the facts do win out," said Friedman. "We've been encouraged by the broad-based supportive response that we've had."

Jefferies shares have been brutalized in the aftermath of MF Global's Oct. 31 bankruptcy filing, as investors worried that Jefferies might have similar troubles. Bond-rating agency Egan Jones downgraded Jefferies on Nov. 2, arguing that the bank is also too highly leveraged with a heavy reliance on short-term debt.

Jefferies is down more than 20 percent since MF Global's bankruptcy, compared with a 12 percent drop for the NYSE Arca Securities Broker/Dealer Index , which includes Jefferies and competitors like Goldman Sachs Group Inc , Morgan Stanley and Raymond James Financial Inc .

MF Global's downfall came from big bets on troubled European debt combined with a heavy reliance on short-term funding. Jefferies executives have tried hard to distance the firm from its felled competitor, even taking the unusual step of publicly disclosing the CUSIP numbers of all the European bonds it holds.

But after brief respites from investor pressure after each statement, a new worry cropped up in the market.

Addressing the latest concerns in the letter on Monday, Jefferies executives said the bank had not sold its European debt to an affiliate and was under no obligation to repurchase the bonds at a later date.

They also dismissed reports that clients have been fleeing Jefferies' prime brokerage business and said there has been no "undisclosed major loss" at its partnership with Leucadia National Corp .

While there is still time before its fiscal fourth quarter closes on Nov. 30, the executives also said they expect Jefferies to post an operating profit, excluding costs related to its purchase of Prudential Bache, and "stronger" results than the previous period.

Jefferies shares closed up 0.4 percent to $10.20 after a rocky day of trading during which the shares fell as much as 5.5 percent and rose as much as 3.2 percent.

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