[ by Howard Haykin ]

Too much of Jefferies' gain from Knight rescue apparently allocated to employees.

Shares of the Jefferies Group were pummeled in Thursday's market session.  Shares opened 58¢ lower than Wednesday's closing price of $15.66 and remained lower throughout the trading session.  The closing price of $14.52 as each share lost $1.14 or 7.28% of its prior day's value. 

Jefferies released its earnings early Thursday morning, but the "handwriting was on the wall" beginning Wednesday, when traders started buying put options, suggesting expectations of a downward price movement in reaction to 3rd quarter earnings numbers.  Unfortunately, the bears were right on target.

The Jefferies Group, which helped rescue Knight Capital Group, took its biggest decline in over 8 months, after reported revenue and earnings numbers fell short of analysts’ estimates excluding gains from the deal.  Jefferies helped arrange a $400 million bailout for Knight Capital earlier this year after trading losses spurred by a software failure. The share ownership added $103.3 million to Jefferies’s principal-transaction revenue and 8 cents to its earnings per share, according to a statement today from the New York-based firm.

Why only 8 cents for shareholders?    “There is some disappointment that more of the Knight gain did not accrue to shareholders,” said Susquehanna analyst Douglas Sipkin.  “Knight made a big gain of $100 million, so 'Why are you paying out so much of that to employees?'”

Jefferies set aside $440 million, or 60% of net revenue, for compensation in the quarter, compared with $300 million, or 59%, a year earlier. The firm's employee count has stayed pretty consistent over the past year.

The silver lining is that Moody’s Investors Service reported this month that Jefferies probably will report “solid financial results” for the rest of the year,   Among other positives, the firm has kept leverage down and has a “more liquid, less complex” balance sheet than its larger peers, Moody’s said.

For further details, go to:  [ Reuters via CNBC.com, 9/20/12 ].