Jefferies’ trades for failed fund scrutinised in lawsuit

A legal battle between partners of a failed hedge fund has ensnared Jefferies, the fast-growing investment bank, which is accused of allowing one partner to run illicit trades on the side, generating fees for its brokerage arm. 

Jefferies served as prime broker to the Oklahoma-based fund, known as Carbon Fund, which was focused on long/short bets in the industrial sector.

Two of the partners accuse the third, Lee Bressler, of operating a secret scheme to make trades with borrowed money, using the fund’s $10m of assets as collateral. The trades netted big commissions for Jefferies, but losses led to the collapse of the fund.

Prime broking businesses act as a kind of concierge to hedge funds, supplying them with everything from loans and research to introductions to investors. According to the complaint, Mr Bressler was given enough credit by Jefferies to amass notional exposures worth “hundreds of millions of dollars,” well in excess of the risk limits that should have applied.

Jefferies is not named as a defendant in the lawsuit, which was filed in Oklahoma County district court last month by Mr Bressler’s former partners, Rick Nagel and Brandon Bradford. 

The lawsuit claims that Mr Bressler’s side-trades began in December last year and unravelled when he was caught out by a big fall in the share price of Tesla in early February. He then tried to make up losses through a bet on Amazon, which also backfired, it is alleged. 

The bet on Tesla exceeded $45m, or roughly 45 times the trading limit set by Carbon, which was 10 per cent of assets. After Mr Bressler exited the positions, trying to cover his losses, the fund’s primary account at Jefferies was left with a negative balance of $2.5m.

A Jefferies spokesperson said: “The notion that there were secret accounts at Jefferies is patently false. Carbon Fund partners, fund administrators, and accountants had full access to, and were routinely provided with, information about all accounts at Jefferies. As it pertains to the underlying trading in this matter, Jefferies was one of the many victims and is seeking legal redress for its $2.4m in losses.”

Ralph Siciliano, a lawyer for Mr Bressler at Tannenbaum Helpern Syracuse & Hirschtritt in New York, said that his client “vigorously denies these baseless allegations and will defend himself against them”. Court proceedings are currently stayed, pending arbitration.

The named plaintiffs in the suit are Carbon Investment Partners and Carbon Master Fund, run by Mr Nagel and Mr Bradford, who are executives at Acorn Growth Companies, a private equity firm based in Oklahoma City. Mr Bressler and Mr Bradford were former colleagues at Millennium Management, the $35bn-in-assets hedge fund run by Izzy Englander. The trio launched Carbon in November 2016 with about $10m in assets. Funds connected to Mr Nagel put up about $7m of the money.

The battle comes at a time when Jefferies, the last independent investment bank of any significant size in the US, is expanding on Wall Street, determined to take advantage of a strong balance sheet and a lighter supervisory framework than rivals such as Goldman Sachs and Morgan Stanley, which have to answer to federal banking regulators.

Jefferies’ commissions from trading in the last fiscal year came to $593m, up more than a quarter since 2010, defying broad industry-wide falls over that period. “It is the one company that has come out of the pack of ‘boutique’ investment banks to become a real contender,” said Chris Kotowski, analyst at Oppenheimer.

Earlier this week Jefferies’ publicly listed owner, Leucadia Corp, said it would shed about $1.3bn of non-finance industry assets and rename itself Jefferies Financial Group, to better reflect what chief executive Richard Handler called its “clear focus and drive”.