While the fallout from the shocking flash volatility in the Swiss franc remains to be sorted out, shares of Leucadia National, parent of investment bank Jefferies, were halted in midday trading.
Jefferies to purchase or extend credit to FXCM
After the abrupt move in the Swiss franc rocked markets, it left FXCM customers owing nearly $225 million in margin calls to the brokerage. In turn, the company seeking $300 million in a lifeline from Jefferies, The Wall Street Journal reported. Derivatives industry regulators are said to be monitoring the situation to avoid any market security issues.
FXCM was known to favor high leverage for trading and was documented to have lobbied against regulators who wanted to increase margin requirements.
Foreign exchange trading accounts are particularly exposed to complex and murky brokerage issues if a company declares bankruptcy. Industry regulators are likely trying to avoid problems that occurred during the MF Global and Peregrine Financial Group bankruptcies, where foreign exchange accounts did not fare as well as general segregated accounts. The regulatory preference in such a situation is to avoid bankruptcy as it has the potential to damage market structure and make more difficult the task of brokerage account holders to regain control over their assets.
While a bankruptcy is among the worst possible of all brokerage scenarios for regulators and customers, one foreign exchange brokerage firm called it quits this morning. Citing a recent move in the Swiss franc, Alpari (UK) Limited today announced its insolvency.
Swiss National Bank’s decision
“The Swiss National Bank’s unexpected policy reversal of capping the Swiss franc against the euro has resulted in exceptional volatility and extreme lack of liquidity,” the brokerage said in a statement. “This has resulted in the majority of clients sustaining losses which has exceeded their account equity. Where a client cannot cover this loss, it is passed on to us.” Alpari was rumored to be having difficulty in 2014, according to industry sources, and the recent volatility in the foreign exchange markets is likely to have knocked down an already teetering firm. The bankruptcy will be handled by British regulators in accordance with FCA rules.
Derivatives industry professionals note that brokerages all carry different risk management policies and that firms that adhered to conservative margin and risk management principles fared just fine. Algorithmic hedge funds that were short the currency were said to have had difficulty exiting the dramatic move before it took a breather today. When markets move too quickly and too dramatically in price many algorithmic players and brokerage risk management systems do not catch the signal in time, but trading results always vary depending on the trader and system utilized. Managed futures hedge fund exposure to the CHF/EUR currency spread was said to be light preceding the event.
FXCM, the largest retail foreign-exchange brokerage in the United States is negotiating with Jefferies to obtain $200 million capital, according to Bloomberg based on information from people familiar with the situation.
According to the report, the people requested anonymity because the discussion between FXCM and Jefferies is private.
FXCM negatively impacted by Swiss National Bank’s latest move
Yesterday, FXCM issued a statement disclosing that “clients experienced significant losses” due to the unprecedented volatility of the EUR/CHF currencies following the announcement of the Swiss National Bank to abandon the franc’s cap against the euro. The Swiss central bank ended its policy designed to protect Swiss economy from the sovereign debt crisis in the European region.
The situation resulted to clients owing approximately $225 million on their accounts.
“As a result of these debit balances, the company may be in breach of some regulatory capital requirements. We are actively discussing alternatives to return our capital to levels prior to today’s events, and discussing the matter with our regulators,” said FXCM.
During the previous quarter, FXCM handled around $1.4 trillion trades by individuals. The stock price of the company declined 15%, which brought down its market cap to approximately $596 million.
According to Bloomberg, the spokesperson of Jefferies declined to comment regarding the issue, while a representative from FXCM did not yet respond to its inquiry. A spokeswoman for Jefferies did not immediately respond to a request for comment from ValueWalk.
FXCM stock plummeted
Today, the trading of the shares of FXCM was halted due to pending news. “We halted the common stock of FXCM – News Pending,” said the New York Stock Exchange (NYSE) around 9:22 a.m. today.
During the pre-market trading, the stock dropped 85% from its closing price of $12.63 per share yesterday.
As of 10:38 A.M. in New York, the shares of FXCM were still halted.
Credit Suisse lowered their rating for the shares of FXCM from Outperform to Underperform and reduced their price target from $18 to $4 per share. According to the firm, “details are sparse but we believe FXCM’s liquidity providers stopped making markets in the Swiss Franc, leaving the company unable to close losing client positions as the cushion provided by client collateral was absorbed.” Other sell side firms also lowered price targets in an effort to play catch up.
Jeffries has lowered its price target for Standard Chartered from 730p to 722p (currently trading at 931p), arguing that the idiosyncratic risk behind the original Underperform rating will be exacerbated by macroeconomic headwinds in the emerging markets where Standard Charteredis most active. This could force STAN to de-risk since it only has 10.5% tier 1 common equity, while TSB Banking, Lloyds Banking, and the Royal Bank of Scotland all have more than 15%.
“In our view, it is untenable that the UK-listed and regulated bank with the greatest prospective intermediate-term tail risk emerges with the lowest estimated CET1 ratio in 2016,” writes Jefferies analyst Joseph Dickerson.
Jefferies was already bearish on Standard Chartered
Dickerson’s bearishness on Standard Chartered stems first from idiosyncratic risk: revenues in the corporate finance division have leveled off and could start to fall; underwriting has moved to lower rated companies causing impairments to rise 86% year-on-year in 3Q14; and according to Jefferies survey of more than 10,000 companies in STAN’s footprint, credit quality is deteriorating even without macroeconomic conditions getting worse.
“The tailwinds that benefited Standard Chartered from 2008-2013 became headwinds in 2014,” writes Dickerson. “While these headwinds are expected to continue over 2015-16, we now believe they will be exacerbated by a deteriorating macro environment.”
Unwinding EM credit cycle could increase Standard Chartered’s impairments
The macro environment that Dickerson is talking about is the unwinding of the emerging market credit cycle. Since 2008 advanced economy bond allocations to emerging markets have increased from 4% to more than 9%, but that changed at the end of 2013 and bond fund outflows have been steady throughout 2014. With a stronger dollar and the first Fed rate hike on the horizon, those outflows are more likely to increase than switch back to inflows this year.
At the same time, private sector leverage has grown dramatically in some of Standard Chartered’s key markets like Hong Kong and Singapore. Dickerson argues that credit can’t keep growing at this pace, especially as EM corporate credit quality is deteriorating, which limits Standard Chartered’s prospects for revenue growth and puts it at risk of larger impairments this year. Household leverage has also grown rapidly in these markets, and if consumer credit starts to deteriorate alongside corporate credit, the impact could be even more severe.
Finally, Dickerson says that falling commodity prices will have a big impact on Standard Chartered’s impairments, and since the decline started last year the damage will show up in Q4 earnings when Standard Chartered reports in March.
“Sage Kelly has resigned from Jefferies in order to focus on family matters,” was the comment from Jefferies Group LLC (NYSE:JEF) CEO Richard Handler, tucked into the end of a memo announcing the re-shuffling of the highly profitable healthcare investment banking staff, which was obtained by Julie VerHage of Fox Business Network.
Kelly, you see, was the deal maker. He knew how to keep clients entertained, stimulating their senses on a number of levels.
Sage Kelly’s customer service orientated approach
The extent to which Kelly’s customer service orientated approach won business was on display at the Boston Ritz Carlton, on a night when he was working hard to win business from Marc Beer, CEO of Aegerion Pharmaceuticals, Inc. (NASDAQ:AEGR).
As reported in ValueWalk, after an alcohol and drug filled evening featuring copious amounts of cocaine revved their engines, the foursome made it back to a double-bed room at the Ritz Carlton. Beer landed on one bed as his “prancing, big-breasted girlfriend” soon followed, according to court documents filed in a divorce case. Cloths from all involved quickly littered the floor and Christina Kelly found herself having sex with her husband, Sage, in a double bed right next to Beer and his girlfriend. As the night heated up, Beer, the potential client, had a desire to switch it up. Assisting in the sales process, Christina Kelly soon found herself having sex with Beer’s girlfriend while the two men watched. This didn’t last long as Beer and Christina Kelly began having sex, while Sage Kelly took on Beer’s girlfriend. Christina Kelly would later say she didn’t want to disappoint Beer because she was mindful of Sage Kelly’s goal to secure his business. Sage Kelly won the business from Aegerion Pharmaceuticals, Inc. and they was reported to have a close business relationship with the Pharmaceutical firm.
Sage Kelly’s divorce
After providing a peak into the wilder side of Wall Street life through court documents, Sage Kelly would later settle his divorce with wife Christina in a more quiet fashion. Today benchmarks the end of Sage Kelly’s career at Jefferies, as it is unclear as to the “family matters” that Kelly is attending to. Moving up to fill the gap will be Jon Santemma and Ben Lorello, co-chairmen of the Global Healthcare Investment Banking Leadership Committee. It is also unclear if the new “services” co-heads Dan Decelles and Mike Gerardi are planning as division heads, but one might think their definition of customer service might differ slightly from Kelly.
Competition in the 3D printing market is heating up with the entry of companies like Canon, Hewlett-Packard, Autodesk and Epson. The current market leader 3D Systems Corporation (NYSE:DDD) is betting big on acquisitions to challenge its bigger new entrants with fat pockets. On Monday, the Avi Reichental-led company announced that it has signed a deal with Israel-based CAD/CAM software maker Cimatron Ltd. (NASDAQ:CIMT).
Cimatron stock rallies 43%
Shares of Cimatron rallied more than 43% following the announcement. 3D Systems has agreed to pay $8.97% per Cimatron share, a 47.5% premium to the stock’s Friday closing price. It values the Israeli company at $97 million. The deal will strengthen 3D System’s position in the rapidly-growing 3D manufacturing and design business. It will also add “complementary products and technology” to 3D Systems’ portfolio and expand its sales coverage.
The Rock Hill-based company expects the acquisition to be accretive to its non-GAAP earnings immediately after the transaction. The deal has already been approved by boards of the two companies. Pending regulatory approvals, Reichental expects to close the transaction in the first quarter of 2015. Cimatron has two major products, GibbsCAM and CimatronE, which are used by “a growing number of companies” worldwide.
3D Systems building up capabilities ahead of HP entry
3D Systems was advised by Needham & Company, while Hunton & Williams LLP and Gornitzky & Co served as its legal counsel. Prometheus Financial Advisory served as a financial advisor to Cimatron. The deal comes just a few months Stratasys, Ltd. (NASDAQ:SSYS), the biggest rival of 3D Systems, acquired GrabCad in September for around $100 million.
Last week, Jefferies analyst Jason North slashed his price target on 3D Systems from $46 to $42, citing rising competition and execution risks. The analyst says 3D Systems has purchased about 50 companies in the past few years. Integrating and streamlining its acquisitions will be a big challenge. 3D printing companies have been boosting their capabilities ahead of Hewlett-Packard’s entry in the market in 2016.
3D Systems shares increased 3.13% to $36.25 at 10:42 AM EST on Monday.
3D Systems Corporation (NYSE:DDD) shares fell 1.61% yesterday to $35.46. The stock has declined more than 55% over the last 12 months amid execution risks and concerns over the entry of new competitors in 3D printing industry. On Thursday, Jefferies analyst Jason North reduced his price target on the stock from $46 to $42, though he maintained a Buy rating.
3D Systems can protect its near-term profits
The 3D printing leader has acquired about 50 companies in the past few years. The company needs to show flawless execution to integrate those acquisitions. North said the execution risk was clearly evident in the launch of the Cube 3, which was delayed. Even when the product arrived, the supply was limited, and early customers faced trouble with the cartridges.
Further, the entry of heavyweights like Hewlett-Packard, Autodesk, Canon, IPG Photonics, Epson and Ricoh could force 3D Systems to cut its prices. Jefferies said that the Rock Hill-based company could protect its near-term profits by cutting prices. North cut the price target to reflect a change in his 2016 estimate. Jefferies now estimates an EV/sales ratio of 3.5x, assuming 20% discount to peers.
Jason North spoke to most of the new entrants in 3D printing. He believes that they could grow to become dominant 3D printing players. For instance, Autodesk wants its Spark 3D printing software to become an industry standard. Last month, Hewlett-Packard unveiled its Multi-Jet Fusion, which will be available in 2016. HP’s process is similar to 3D Systems’ Z Corp binder jetting MJM process.
3D Systems director buys shares
3D Systems released its third-quarter results earlier this month. The company reported net earnings of $3.1 million, missing the consensus estimate of $6.9 million. Third-quarter revenues came in at $166.9 million. For the full year, the company forecasts revenue between $650 million and $690 million with earnings between 70 and 80 cents per share.
Separately, 3D Systems director Kevin Moore revealed in an SEC filing that he purchased 5,000 shares of the company in the open market transaction dated Nov.19. He purchased those shares at the average price of $35.98 per share. Following the transaction, Moore directly owns 7,734 shares of 3D Systems.
3D Systems shares inched up 1.30% to $35.92 in pre-market trading Friday.
Zynga Inc (NASDAQ:ZNGA) received a Buy rating from Jefferies analysts, who are highly positive on the title Words With Friends, a multi-player, scrabble-like word game. Analysts upgraded the stock from the previous rating of Hold with a price target of $4.40 per share.
Words with Friends a “legitimate hit”
Analyst Brian Pitz said that the gaming company has a “legitimate hit” with a multi-player scrabble like game called Words with Friends. Pitz mentioned in the report, “Zynga’s fast-growing mobile business now looks large enough to move the needle, offsetting the headwinds around its legacy Facebook/web game business.”
Pitz said that currently Word with Friends is the third most downloaded app, which is a significant metric reflecting revenue potential. Analyst added that the game should expand its user base on the back of strong seasonal trends around holiday prices and strong demand for video ads.
In 2009, the game was a major hit and was re-launched on the App store in early October. Words with Friends new version is packed with features including Solo Play, in which a player can practice on their own, and Community Match, which helps find a player the best opponent. The game is free to download and highly popular all time in the list released last year. Zynga Inc’s revenue source is ads on the game.
Exciting product pipeline for Zynga
Additionally, Pitz is also high on Zynga’s 2015 game pipeline including “Tiger Woods Golf” and other titles from the recently acquired developer NaturalMotion, as well as Real Housewives & Bridesmaids-themed versions of Hit it Rich Slots.
In a recent report, Wedbush analysts noted that Zynga is on the right track, but the company needs to make more efforts to face current challenges. The analysts noted that the games maker’s pace of new releases is “underwhelming,” and this along with the company’s past record, makes Zynga a “show me” stock. The WB analysts still assigned the company an Outperform rating and put a price target of $6 on the shares.
On November 6, Zynga posted its quarterly earnings, which were largely in line with expectations, but a majority of analysts want more from the company. Zynga currently trades around $2.75 a share, but shares were up on Tuesday following the report. Year to date shares are down over 35%.
Negotiations to provide a financial settlement for Christina Kelly have been tentatively reached, according to a Bloomberg report by Stephanie Ruhle and Zeke Faux. The wife of Jefferies banker Sage Kelly made salacious charges in divorce documents against her husband that were the subject of intense press scrutiny and the butt of Wall Street jokes. While terms of the divorce are unknown, Christina Kelly was negotiating to receive a $7 million settlement from her husband.
The use of drugs to entertain clients
As previously reported in ValueWalk, in leaked court documents Christina Kelly detailed a cornucopia of drugs being used to entertain clients and work colleagues along with late night binges that included Christina being offered up to a client in an apparent drug-laced sexual orgy that stretched the definition of “customer service” on Wall Street.
All appears good now, as Christina, with a settlement in hand, says her husband is a man of “high integrity” and “is a great father who deeply loves our children,” according to a signed document reviewed by Bloomberg. The settlement that was reached appeared to satisfy Christina, as she said it “ensures loving homes for our children.” Terms of the deal were not disclosed and the agreement could still unravel as it requires a judge’s approval, but odds favor a settlement unless one party recants.
Christina then took issue with the press coverage. “A substantial portion of what has been written in the press and other media over the past few weeks is inaccurate, untrue or hyperbolic, and I apologize to those who have been affected thereby — including those at Jefferies and those associated with Jefferies,” she said.
Sage Kelly and Jefferies both damaged by the charges
The charges were documented to have damaged both Sage Kelly and Jefferies, but the impact of a whisper campaign that took place behind the scenes is more difficult to document. Sage Kelly, 42, operates Jefferies highly profitable health-care banking group, which generated nearly $500 million in fees over the last three years, the report noted.
Jefferies Chief Executive Officer Richard Handler moved quickly to stem the damage, requiring employees to submit to a drug test that he says turned up negative, according to the report, while accusing larger banks of spreading “lurid details” of allegations that Handler was reported to have called “pure fabrication.”
When the movie “The Wolf of Wall Street” was released, it popularized a drug-filled, greed infested environment where small investors, many retirees, were fleeced of their savings by questionable brokerage salespeople using boiler room tactics to fuel a sex-filled party of unmanageable proportion.
The movie was dismissed by many in the Wall Street establishment as the indiscretions of small time penny stock hustlers, nothing that would represent the more dignified world of real bankers.
Sage Kelly’s wife files for divorce
Then came the divorce filing from Christina Di Mauro Kelly, wife of Jefferies Group LLC (NYSE:JEF) banker Sage Kelly, which sent the firm scrambling. The firm has lost clients as a result of the allegations, and is now drug testing their employees, Bloomberg reports.
The uproar started after details of the lawsuit became public. Court documents, posted by ZeroHedge, read like steamy sex novel combined with the drug-induced haze of the Hunter S. Thompson book “Fear and Loathing in Las Vegas.”
While all divorce stories should be heard with a grain of salt, this cocaine-snorting, Molly-dropping, hallucinogenic mushroom swilling, wife swapping tale has already led to irreparable harm to Sage Kelly and his firm, which has apparently lost business over the event, according to a tweet by Fox Business journalist Charlie Gasparino.
The complaint tells a tale of a marriage filled with drugs and orgy-like sex parties, which Sage Kelly used to his advantage in securing investment banking business for Jefferies.
Sage Kelly along with his wife were entertaining Aegerion SEO
As just one example, Christina Kelly, 39, alleges that she and her husband were entertaining potential client Marc Beer, CEO of Aegerion Pharmaceuticals, Inc. (NASDAQ:AEGR), in Boston. After an alcohol and drug filled evening featuring copious amounts of cocaine revved their engines, the foursome made it back to a double-bed room at the Ritz Carlton. Beer landed on one bed as his “prancing, big-breasted girlfriend” soon followed. Cloths from all involved quickly littered the floor and Christina found herself having sex with her husband in a double bed right next to Beer and his girlfriend.
As the night heated up, Beer, the potential client, had a desire to switch it up. Christina Kelly soon found herself having sex with Beer’s girlfriend while the two men watched. This didn’t last long as Beer and Christina Kelly began having sex, while Sage Kelly took on Beer’s girlfriend.
Christina Kelly would later say she didn’t want to disappoint Beer because she was mindful of Sage Kelly’s goal to secure his business.
Sage Kelly won the business from Aegerion Pharmaceuticals, Inc. (NASDAQ:AEGR) and they was reported to have a close business relationship with the Pharmaceutical firm.
That’s strong example of a customer service policy that doesn’t disappoint the customer. Kelly has taken a leave of absence according to the firm.
Find the Jefferies response to the uproar here, and the court document below.