Jefferies shares tumble as CEO alleges fraud tied to First Brands exposure

Jefferies dropped a bomb in front of its investors. Rich Handler, the bank’s CEO, came out swinging on Thursday, saying loud and clear: “We believe we were defrauded, OK?”

That statement hit as the firm scrambled to explain why it had so much exposure to First Brands Group, the now-bankrupt auto parts supplier. This wasn’t some minor position. Jefferies had helped the company raise billions in debt while also having its own cash tied up through Point Bonita Capital, one of its investment arms.

Over the past month, Jefferies’ shares have dropped 25%, a straight punch to the gut. Handler made the remarks during a tense investor day, where analysts didn’t hold back on questions about how deep the First Brands mess goes. “I’ll just say, this is us personally, we believe we were defrauded,” Handler said, clearly frustrated as the pressure built.

Point Bonita fund faces backlash over $715mn First Brands exposure

This all comes as broader fears about credit quality hit U.S. banks hard. The KBW Regional Bank Index dropped 6% on Thursday alone, while names like Western Alliance and Zions Bank disclosed their own messy run-ins with allegedly fraudulent borrowers.

At the same time, Tricolor, a separate auto lender, is also being scrutinized for loan issues. That’s thrown more fuel on the fire, making some investors say this isn’t just a one-off.

One investor flat-out called it a “risk management 101 failure,” referring to the fact that Point Bonita had $715 million worth of exposure tied to First Brands. Ian Lapey from Gabelli said this whole thing was getting harder to spin as some random, isolated event, especially since Jefferies’ own hedge fund recently took a hit from an alleged Ponzi scheme too. Handler had to sit through all of it.

Jefferies’ president Brian Friedman pushed back, saying the exposure was mostly to First Brands’ “investment-grade-rated customers,” and tried to frame that as a positive. He argued that Jefferies itself didn’t have as much skin in the game, since it only owned a small part of the equity in the fund. But no one in that room was buying easy answers.

Jefferies leveraged finance linked to $6bn deal with First Brands

It wasn’t just about Point Bonita. Jefferies’ leveraged finance unit also helped First Brands raise cash multiple times. One big deal, a $6 billion loan, got pulled in August after red flags started popping up. That alone raised questions about what Jefferies really knew, and when.

Handler insisted Jefferies wasn’t helping First Brands acquire companies behind the scenes. In his words: “We were actually helping clients sell their companies and they were the buyer.”

He even joked at one point that some of the questions were “giving my general counsel a heart attack.” But this isn’t comedy hour. The fund’s exposure and the fact that Jefferies played middleman in debt deals have created a serious credibility issue.

Friedman added: “If this was fraud — and we don’t know — there’s going to be a knockdown process in bankruptcy court and we’re going to see what’s learned.” He didn’t offer anything more concrete.

Handler also said Jefferies is still doing fine: “We’re basically having a good; can I say we’re having a good quarter? Allowed to?” But that didn’t land well either. Damage is damage.

Outside the room, the collapse of First Brands and Tricolor sparked a bigger fight. Handler didn’t sugarcoat it. He said: “There’s a fight going on right now between the banks and direct lenders… each wants to point fingers… it’s your fault, no, it’s your fault.” Jefferies, for now, is pointing right at First Brands.

If you're reading this, you’re already ahead. Stay there with our newsletter.