A leading Wall Street investment bank’s top executive claims to have been “defrauded” in the bankruptcy saga surrounding First Brands Group, a collapse that now threatens a chain reaction across global credit markets. At the same time, legendary short-seller Jim Chanos, famed for his role in exposing the Enron scandal, has drawn ominous parallels between this moment and that one, warning this may be another watershed moment for Wall Street.
Jefferies CEO Rich Handler told investors on Thursday that the bank believes it was “defrauded” after being grilled over its exposure to First Brands Group’s bankruptcy, which the bank disclosed in an SEC filing. Handler’s comments followed an investor letter released by Jefferies on Sunday, revealing the bank’s stake in First Brands’ debt—originally thought to be as high as $715 million—is closer to $45 million, a figure it claims is absorbable and not threatening to Jefferies’ overall financial health. Nonetheless, the bank’s share price has plunged over 20% since the bankruptcy unfolded last month.
Handler, who said he did not see the First Brands bankruptcy as a “canary in the coal mine,” talked about First Brands and the wider business climate. “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.” Handler added that he thinks “there’s a fight going on right now between the banks and direct lenders who each want to point fingers at each other and say, ‘It’s your fault.’ ‘No, it’s your fault.’ The fact of the matter is, the economy is generally good.” He noted, “It doesn’t feel like we’re on the edge of a default cycle, quite frankly, to me, and I’ve been on the edge of default cycles before.” It also doesn’t look to him like the climate in 2007, “when the world’s about to come to an end.” The canary in the coal mine, he added, is usually the entire financial sector, and he just doesn’t see that.
Handler’s statement comes amid growing public scrutiny. First Brands, a sprawling auto-parts conglomerate, collapsed with over $2 billion reportedly missing from its accounts and more than $10 billion owed to creditors, including some of Wall Street’s biggest firms.
In their letter, Handler and Jefferies president Brian Friedman strongly denied earning undisclosed fees and emphasized the bank was never aware of fraudulent activity at First Brands, stating: “We learned of the fraud allegations when the rest of the public learned.” Regarding the blow to the company’s financial position, they said they believe the “impact on our equity market value and credit perception … is meaningfully overdone, and we expect this to correct soon as the facts and range of outcomes are better understood.”
