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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-K
 
     
o
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
OR
þ
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
    For the transition period from January 1, 2010 to November 30, 2010


For the quarterly period ended November 30, 2010


 
Commission File Number: 1-14947
 
JEFFERIES GROUP, INC.
(Exact name of registrant as specified in its charter)
 
     
Delaware
(State or other jurisdiction of
incorporation or organization)
  95-4719745
(I.R.S. Employer
Identification No.)
     
520 Madison Avenue,
New York, New York
(Address of principal executive offices)
  10022
(Zip Code)
 
Registrant’s telephone number, including area code:
(212) 284-2550
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class:   Name of Each Exchange on Which Registered:
 
Common Stock, $.0001 par value
  New York Stock Exchange
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o     No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K.  þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated filer þ
  Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $2,613,319,702 as of May 31, 2010.
 
Indicate the number of shares outstanding of the registrant’s class of common stock, as of the latest practicable date. 177,737,253 shares as of the close of business on January 19, 2011.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Information from the Registrant’s Definitive Proxy Statement with respect to the 2011 Annual Meeting of Stockholders to be held on May 9, 2011 to be filed with the SEC is incorporated by reference into Part III of this Form 10-K.
 
LOCATION OF EXHIBIT INDEX
The index of exhibits is contained in Part IV herein on page 129.
 


 

 
JEFFERIES GROUP, INC.
 
2010 FORM 10-K ANNUAL REPORT
 
TABLE OF CONTENTS
 
                 
        Page
 
      Business     1  
      Risk Factors     5  
      Unresolved Staff Comments     10  
      Properties     10  
      Legal Proceedings     10  
      (Removed and Reserved)     10  
 
PART II
      Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     11  
      Selected Financial Data     13  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     15  
      Quantitative and Qualitative Disclosures About Market Risk     49  
      Financial Statements and Supplementary Data     52  
      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     127  
      Controls and Procedures     127  
      Other Information     128  
 
PART III
      Directors, Executive Officers and Corporate Governance     128  
      Executive Compensation     128  
      Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     128  
      Certain Relationships and Related Transactions, and Director Independence     128  
      Principal Accountant Fees and Services     128  
 
PART IV
      Exhibits, Financial Statement Schedules     129  
 EX-10.11
 EX-21
 EX-23.1
 EX-23.2
 EX-31.1
 EX-31.2
 EX-32
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT


Table of Contents

 
PART I
 
Item 1.   Business.
 
Introduction
 
Jefferies Group, Inc. and its subsidiaries operate as a global full service, integrated securities and investment banking firm. Our principal operating subsidiary, Jefferies & Company, Inc. (“Jefferies”), was founded in the U.S. in 1962 and our first international operating subsidiary, Jefferies International Limited, was established in the U.K. in 1986. Since 2000, we have pursued a strategy of continued growth and diversification to increase our market share and expand the breadth of business. Our growth plan has been achieved through the ongoing addition of talented personnel in targeted areas, as well as the acquisition of complementary businesses.
 
As of November 30, 2010, we had 3,084 employees in more than 25 cities throughout the world. Our executive offices are located at 520 Madison Avenue, New York, New York 10022. Our telephone number is (212) 284-2550 and our Internet address is jefferies.com.
 
We make available on our public website the following documents and reports:
 
  •  Code of Ethics;
 
  •  Reportable waivers, if any, from our Code of Ethics by our executive officers;
 
  •  Board of Directors Corporate Governance Guidelines;
 
  •  Charter of the Audit Committee of the Board of Directors;
 
  •  Charter of the Corporate Governance and Nominating Committee of the Board of Directors;
 
  •  Charter of the Compensation Committee of the Board of Directors;
 
  •  Annual reports on Form 10-K;
 
  •  Quarterly reports on Form 10-Q;
 
  •  Current reports on Form 8-K; and
 
  •  Beneficial ownership reports on Forms 3, 4 and 5.
 
Shareholders may also obtain a printed copy of any of these documents or reports by sending a request to Investor Relations, Jefferies & Company, Inc., 520 Madison Avenue, New York, NY 10022, by calling 203-708-5975 or by sending an email to info@jefferies.com.
 
Business Segments
 
We currently operate in two business segments, Capital Markets and Asset Management. The Capital Markets reportable segment includes our securities trading (including the results of our indirectly partially owned subsidiary, Jefferies High Yield Trading, LLC) and investment banking activities. The Capital Markets reportable segment is managed as a single operating segment that provides the research, sales, trading and origination effort for various equity, fixed income and advisory products and services. The Asset Management segment includes asset management activities and related services.
 
Financial information regarding our reportable business segments as of November 30, 2010, December 31, 2009 and 2008 is set forth in Note 21 of the Notes to Consolidated Financial Statements, titled “Segment Reporting” and is incorporated herein by reference.
 
Our Businesses
 
Capital Markets
 
Our Capital Markets segment includes our Equities, Fixed Income and Commodities and Investment Banking businesses. We primarily serve institutional investors, corporations and government entities.


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Equities
 
In Equities, we provide our customers equity research, cash equity sales and trading, electronic trading, equity derivatives, exchange traded funds, prime brokerage and securities finance. We operate globally, with most of our business currently conducted from the U.S. and Europe. During 2010, we commenced building a full service equity research, sales and trading offering in Asia with the addition of new employees to our Hong Kong broker-dealer subsidiary, Jefferies Hong Kong Limited, and to our Japanese broker-dealer subsidiary, Jefferies (Japan) Limited. The establishment of a pan-Asian equities business is consistent with our strategy to be a global, full service securities and investment banking firm and complements our existing investment banking and fixed income presence in Asia.
 
Equity Research, Sales and Trading
 
We engage in listed block trades, NASDAQ market making, bulletin board trading, creation, redemption and trading in exchange-traded funds, equity capital markets offerings and placements, risk arbitrage, statistical arbitrage, special situations, pair trades, relative value, and portfolio, algorithmic and other electronic trading, as well as trading in American Depository Receipts and Ordinary Shares. Our clients include local and global investors such as investment advisors, banks, mutual funds, insurance companies, hedge funds, and pension and profit sharing plans. Our Wealth Management group focuses on serving smaller institutions, family offices and high net worth individuals. Through our Jefferies Execution Services subsidiary, we provide our institutional customers agency-only execution services for stocks and options listed on the NYSE, AMEX, and all other major U.S. exchanges, as well as execution services for over-the-counter securities.
 
Encompassed within equity sales and trading is equity research and research sales. We provide long and short term investment ideas across a broad range of sectors and industries in the U.S., European and Asian markets. Our coverage universe includes over 1,200 individual companies around the world.
 
Equity Derivatives
 
We offer derivative solutions for investors seeking to manage risk and optimize returns within the equities market. We focus on serving the diverse needs of our institutional, corporate and wealth management clients across multiple product lines, offering listed options, exchange-traded funds, and over-the-counter options and swaps.
 
Prime Brokerage Services
 
We provide hedge funds, money managers and registered investment advisors prime brokerage financing, clearing and administrative services including consolidated clearance, settlement, custody, financing and portfolio reporting services.
 
Securities Finance
 
In connection with trading, brokerage and prime brokerage activities, we borrow securities to cover short sales, and to complete transactions in which customers have failed to deliver securities by the required settlement date. Likewise, we lend securities to other brokers and dealers for similar purposes. We manage an active securities borrowed and lending “matched book” business in which we borrow securities from one party and lend them to another party. When we borrow securities, we generally provide cash to the lender as collateral, which is reflected in our Consolidated Statements of Financial Condition as Securities borrowed. We earn interest revenues on this cash collateral. Similarly, when we lend securities, our counterparty generally provides cash to us as collateral, which is reflected in our Consolidated Statements of Financial Condition as Securities loaned. We pay interest on the cash collateral received from the party borrowing the securities. The initial collateral advanced or received approximates or is greater than the fair value of the securities borrowed or loaned. We monitor the fair value of the securities borrowed and loaned on a daily basis and request additional collateral or return excess collateral, as appropriate.


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Fixed Income and Commodities
 
Our Fixed Income and Commodities business consists of fixed income sales and trading and commodities derivative trading activities.
 
Fixed Income Sales and Trading
 
Over the last three years, we significantly strengthened and expanded our global fixed income sales and trading platform. Our fixed income effort now encompasses the sales and trading of investment grade corporate bonds, government and agency securities, mortgage- and asset-backed securities, municipal bonds, convertible securities, high yield and distressed securities, bank loans and emerging markets debt. In 2009, Jefferies was designated as a Primary Dealer by the Federal Reserve Bank of New York, and Jefferies International Limited, our U.K. regulated broker-dealer, has since received similar designations in Germany, the United Kingdom, the Netherlands, Portugal and Austria. We also trade in a broad spectrum of other European government bonds.
 
Within the U.S., our high yield activities are primarily conducted through Jefferies High Yield Trading, LLC, which is a registered broker-dealer and a wholly owned subsidiary of Jefferies High Yield Holdings, LLC (“JHYH”). We own voting and nonvoting interests in JHYH and have entered into management, clearing, and other services agreements with JHYH. We and Leucadia National Corporation (“Leucadia”) each have the right to nominate two of a total of four directors to JHYH’s board of directors. Two funds managed by us, Jefferies Special Opportunities Fund (“JSOP”) and Jefferies Employees Special Opportunities Fund (“JESOP”), are also investors in JHYH. The arrangement term is through April 2013, with an option to extend. As a result of agreements entered into with Leucadia in April 2008, any request to Leucadia for the drawdown of additional capital investment in JHYH requires the unanimous consent of the Board of Directors of Jefferies Group, Inc., including the consent of any Leucadia designees to our board.
 
Our strategists and economists provide ongoing commentary and analysis of the global fixed income and high yield markets. In addition, our fixed income research professionals, including research and desk analysts, provide long and short term investment ideas across a variety of fixed income products.
 
Convertibles
 
Our sales and trading professionals in the U.S., London, and Zurich serve the global convertible markets. We offer sales, trading and analysis of convertible bonds, convertible preferred shares, closed end funds, warrants, and equity-linked products.
 
Commodities Derivative Trading
 
Jefferies Financial Products, LLC (“JFP”) offers swaps, options and other derivatives typically linked to various commodity indexes and is a significant provider of liquidity in exchange-traded commodity index contracts. JFP provides financial products and commodity index knowledge to pension funds, mutual funds, sovereigns, foundations, endowments and other institutional investors seeking exposure to commodities as an asset class. In addition, JFP develops and licenses proprietary commodity indexes, such as the Jefferies Commodity Performance Index and the Thomson Reuters/Jefferies CRB Index.
 
Investment Banking
 
We offer our clients a full range of financial advisory services, as well as equity, debt, and equity-linked capital raising services.
 
Over 600 investment banking professionals operate in the United States, Latin America, Europe and Asia, and are organized into industry, product and geographic coverage groups. Industry coverage groups include Aerospace and Defense, Business Services, CleanTech, Consumer, Energy, Financial Institutions, Gaming, Healthcare, Industrials, Maritime, Media, Metals and Mining, Real Estate, Technology, and Telecommunications, as well as Financial Sponsor Coverage.


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Equity Capital Markets
 
We originate and sell direct placements, private equity, private placements, initial public offerings, and follow-on offerings of equity and equity-linked convertible securities.
 
Debt Capital Markets
 
We offer a range of debt financing for companies, governmental entities and financial sponsors. We focus on structuring and distributing public and private debt in leveraged finance transactions, including leveraged buyouts, acquisitions, growth capital financings, mortgage-related and asset-backed securities, municipal securities, public finance, recapitalizations, and Chapter 11 exit financings.
 
Advisory Services
 
We offer companies mergers and acquisitions, recapitalization and restructuring and other financial advisory services. We advise buyers and sellers on sales, divestitures, acquisitions, mergers, tender offers, joint ventures, strategic alliances and takeover defenses. We facilitate and finance acquisitions and recapitalizations on both buyside and sellside mandates. Our service to our clients includes leveraging our industry knowledge, extensive relationships, and capital markets and restructuring expertise.
 
We offer advisory services in connection with exchange offers, consent solicitations, capital raising, and distressed mergers and acquisitions. We provide advice and support in the structuring, valuation and placement of securities issued in recapitalizations and restructurings. We represent issuers, bondholders and creditors, as well as buyers and sellers of assets.
 
Asset Management
 
We provide investment management services to several private investment funds, a number of separate accounts and mutual funds. In the United States, investment management services are provided through Jefferies Asset Management, LLC (“JAM”) and Jefferies Capital Management, Inc. (“JCM”). Each of JAM and JCM is registered as an investment adviser with the SEC. Our private fund products consist of long-short equity, commodity and fixed income funds. These funds are not registered under federal or state securities laws, are made available only to certain sophisticated investors and are not offered or sold to the general public. In addition, JAM acts as a subadvisor to a mutual fund, which engages in commodity and commodity equity strategies and manages certain equity and commodity portfolios as mandated by client arrangements and management fees are assessed based on an agreed upon notional account value. We offer long only investment solutions in global convertible bonds to pension funds, insurance companies and private banking clients.
 
Competition
 
All aspects of our business are intensely competitive. We compete directly with numerous domestic and international competitors, including firms listed in the AMEX Securities Broker/Dealer Index and with other brokers and dealers, investment banking firms, investment advisors, mutual funds, hedge funds, commercial banks and bank holding companies. A number of our competitors have substantially greater capital and resources than we do. We believe that the principal factors affecting our competitive standing include market focus, brand, the qualities and skill of professional personnel, ability to execute specific types of transactions, bundling of products and services and the quality of our service.
 
Regulation
 
Regulation In the United States.  The securities industry in which we operate is subject to extensive regulation. In the U.S., the Securities and Exchange Commission (“SEC”) is the federal agency responsible for the administration of federal securities laws. In addition, self-regulatory organizations, principally Financial Industry Regulatory Authority (“FINRA”), are actively involved in the regulation of broker-dealers. The SEC and self-regulatory organizations conduct periodic examinations of broker-dealers. Securities firms are also subject to regulation by state securities commissions and attorneys general in those states in which they do business.


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Broker-dealers are subject to regulations that cover all aspects of the securities business, including sales and trading methods, trade practices among broker-dealers, use and safekeeping of customers’ funds and securities, capital structure of securities firms, antimoney laundering efforts, recordkeeping and the conduct of directors, officers and employees. Additional legislation, changes in rules promulgated by the SEC and self-regulatory organizations, or changes in the interpretation or enforcement of existing laws and rules may directly affect the operations and profitability of broker-dealers. As an introducing broker-dealer that engages in commodities and futures transactions, we are also subject to regulation by the Commodity Futures Trading Commission (“CFTC”) and the National Futures Association (“NFA”). The SEC, self-regulatory organizations, state securities commissions, state attorneys general, the CFTC and the NFA may conduct administrative proceedings that can result in censure, fine, suspension, expulsion of a broker-dealer, its officers or employees, or revocation of broker-dealer licenses.
 
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) was enacted in the United States. Implementation of the Dodd-Frank Act will be accomplished through extensive rulemaking by the SEC and other governmental agencies. The Dodd-Frank Act also mandates the preparation of studies on a wide range of issues. These studies could lead to additional regulatory changes. At this time, it is difficult to assess the impact that the Dodd-Frank Act will have on us and on the financial services industry.
 
Net Capital Requirements.  U.S. registered broker-dealers are subject to the SEC’s Uniform Net Capital Rule (the “Rule”), which specifies minimum net capital requirements. Jefferies Group is not a registered broker-dealer and is therefore not subject to the Rule; however, its United States broker-dealer subsidiaries are registered and are subject to the Rule, which provides that a broker-dealer shall not permit its aggregate indebtedness to exceed 15 times its net capital (the “basic method”) or, alternatively, that it not permit its net capital to be less than the greater of 2% of its aggregate debit balances (primarily receivables from customers and broker-dealers) or $250,000 ($1.5 million for prime brokers) computed in accordance with such Rule (the “alternative method”). Jefferies, Jefferies Execution and JHYT use the alternative method of calculation. (See pages 45-46 and 121-122 of this Transition Report on Form 10-K for additional discussion of net capital calculations.)
 
Compliance with applicable net capital rules could limit operations of our broker-dealers, such as underwriting and trading activities, that require the use of significant amounts of capital, and may also restrict loans, advances, dividends and other payments by Jefferies, Jefferies Execution, or JHYT to us.
 
Regulation Outside the United States.  We are an active participant in the international fixed income and equity markets and provide investment banking services throughout the world, but primarily in Europe and Asia. As is true in the U.S., our subsidiaries are subject to comprehensive regulations promulgated and enforced by, among other regulatory bodies, the U.K. Financial Services Authority, the Hong Kong Securities and Futures Commission and the Taiwan Financial Supervisory Commission. Every country in which we do business imposes upon us laws, rules and regulations similar to those in the U.S., including with respect to some form of capital adequacy rules, customer protection rules, compliance with other applicable trading and investment banking regulations and a similar panoply of regulatory reform packages in response to the credit and liquidity crisis of 2007 and 2008.
 
NYSE Regulations.  Our common stock is listed on the New York Stock Exchange (“NYSE”). As a listed company, we are required to comply with the NYSE’s rules and regulations, including rules pertaining to corporate governance matters. As required by the NYSE on an annual basis, in 2010 our Chief Executive Officer, Richard Handler, certified to the NYSE that he was not aware of any violation by us of the NYSE’s corporate governance listing standards.
 
Item 1A.   Risk Factors.
 
Factors Affecting Our Business
 
The following factors describe some of the assumptions, risks, uncertainties and other factors that could adversely affect our business or that could otherwise result in changes that differ materially from our expectations. In addition to the factors mentioned in this report, we may also be affected by changes in general economic and business conditions, acts of war, terrorism and natural disasters.


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Recent new legislation and new and pending regulation may significantly affect our business.
 
Recent market and economic conditions have led to new legislation and regulation affecting the financial services industry, both in the United States and abroad. These new measures include limitations on the types of activities in which certain financial institutions may engage as well as more comprehensive regulation of the over-the-counter derivatives market. In addition, fiduciary standards have been imposed on securities firms in their dealings with states, municipalities, and pension funds, among others, which may affect our municipal securities business.
 
These legislative and regulatory initiatives will affect not only us, but also our competitors and certain of our customers. These changes could eventually have an effect on our revenue, limit our ability to pursue certain business opportunities, impact the value of assets that we hold, require us to change certain business practices, impose additional costs on us, and otherwise adversely affect our business. Accordingly, we cannot provide assurance that the new legislation and regulation will not eventually have an adverse effect on our business, results of operations, cash flows and financial conditions.
 
If we do not comply with the new, or existing, legislation and regulations that apply to our operations, we may be subject to fines, penalties or material restrictions on our business in the jurisdiction where any violations occur. In recent years, regulatory oversight and enforcement have increased substantially, imposing additional costs and taxes and increasing the potential risks associated with our operations. As this regulatory trend continues, it could adversely affect our operations and, in turn, our financial results.
 
We cannot fully predict the impact of U.K. bank regulation reform on our business.
 
On June 17, 2010, the U.K. government announced the breakup of its chief financial regulator, the Financial Services Authority, into three separate agencies, including a bank regulating subsidiary inside the Bank of England. It is unclear what effect this reform will have on our business in the U.K. This reform may result in calls to increase capital and to impose new liquidity requirements, and may impose other additional obligations and taxes on our U.K. operations. As a result, these changes could affect our revenue, limit our ability to pursue business opportunities, impact the value of assets that we hold, require us to change certain of our business practices, impose additional costs on us, or otherwise adversely affect our U.K. businesses. Accordingly, we cannot provide assurance that such reform would not have an adverse effect on our business, results of operations, cash flows or financial condition.
 
Changing conditions in financial markets and the economy could result in decreased revenues, losses or other adverse consequences.
 
Our net revenues and profits were adversely affected in 2008 by the equity and credit market turmoil. As a global securities and investment banking firm, global changes in the financial markets or economic conditions could adversely affect our business in many ways, including the following:
 
  •  A market downturn could lead to a decline in the volume of transactions executed for customers and, therefore, to a decline in the revenues we receive from commissions and spreads.
 
  •  Unfavorable financial or economic conditions could reduce the number and size of transactions in which we provide underwriting, financial advisory and other services. Our investment banking revenues, in the form of financial advisory and underwriting or placement fees, are directly related to the number and size of the transactions in which we participate and could therefore be adversely affected by unfavorable financial or economic conditions.
 
  •  Adverse changes in the market could lead to losses from principal transactions.
 
  •  Adverse changes in the market could also lead to a reduction in revenues from asset management fees and investment income from managed funds and losses on our own capital invested in managed funds. Even in the absence of a market downturn, below-market investment performance by our funds and portfolio managers could reduce asset management revenues and assets under management and result in reputational damage that might make it more difficult to attract new investors.


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  •  Increases in credit spreads, as well as limitations on the availability of credit, such as occurred during 2008, can affect our ability to borrow on a secured or unsecured basis, which may adversely affect our liquidity and results of operations.
 
  •  New or increased taxes on compensation payments such as bonuses or on balance sheet items may adversely affect our profits.
 
Our principal trading and investments expose us to risk of loss.
 
A considerable portion of our revenues is derived from trading in which we act as principal. Although a significant portion of our principal trading is “riskless principal” in nature, we may incur trading losses relating to the purchase, sale or short sale of high yield, international, convertible, and equity securities and futures and commodities for our own account. In any period, we may experience losses as a result of price declines, lack of trading volume, and illiquidity. From time to time, we may engage in a large block trade in a single security or maintain large position concentrations in a single security, securities of a single issuer, securities of issuers engaged in a specific industry, or securities from issuers located in a particular country or region. In general, because our inventory is marked to market on a daily basis, any downward price movement in these securities could result in a reduction of our revenues and profits. In addition, we may engage in hedging transactions that if not successful, could result in losses.
 
Increased competition may adversely affect our revenues and profitability.
 
All aspects of our business are intensely competitive. We compete directly with numerous other brokers and dealers, investment banking firms and commercial banks. In addition to competition from firms currently in the securities business, there has been increasing competition from others offering financial services, including automated trading and other services based on technological innovations. Recent changes, such as financial institution consolidations and the U.S. government’s involvement with financial institutions through the Emergency Economic Stabilization Act of 2008 and other transactions, may provide a competitive advantage for some of our competitors. We believe that the principal factors affecting competition involve market focus, reputation, the abilities of professional personnel, the ability to execute the transaction, relative price of the service and products being offered, bundling of products and services and the quality of service. Increased competition or an adverse change in our competitive position could lead to a reduction of business and therefore a reduction of revenues and profits. Competition also extends to the hiring and retention of highly skilled employees. A competitor may be successful in hiring away an employee or group of employees, which may result in our losing business formerly serviced by such employee or employees. Competition can also raise our costs of hiring and retaining the key employees we need to effectively execute our business plan.
 
Operational risks may disrupt our business, result in regulatory action against us or limit our growth.
 
Our businesses are highly dependent on our ability to process, on a daily basis, a large number of transactions across numerous and diverse markets in many currencies, and the transactions we process have become increasingly complex. If any of our financial, accounting or other data processing systems do not operate properly or are disabled or if there are other shortcomings or failures in our internal processes, people or systems, we could suffer an impairment to our liquidity, financial loss, a disruption of our businesses, liability to clients, regulatory intervention or reputational damage. These systems may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, including a disruption of electrical or communications services or our inability to occupy one or more of our buildings. The inability of our systems to accommodate an increasing volume of transactions could also constrain our ability to expand our businesses.
 
We also face the risk of operational failure or termination of any of the clearing agents, exchanges, clearing houses or other financial intermediaries we use to facilitate our securities transactions. Any such failure or termination could adversely affect our ability to effect transactions and manage our exposure to risk.
 
In addition, despite the contingency plans we have in place, our ability to conduct business may be adversely impacted by a disruption in the infrastructure that supports our businesses and the communities in which they are


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located. This may include a disruption involving electrical, communications, transportation or other services used by us or third parties with which we conduct business.
 
Our operations rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code, and other events that could have a security impact. If one or more of such events occur, this potentially could jeopardize our or our clients’ or counterparties’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our, our clients’, our counterparties’ or third parties’ operations. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us.
 
Asset management revenue is subject to variability based on market and economic factors and the amount of assets under management.
 
Asset management revenue includes revenues we receive from management, administrative and performance fees from funds managed by us, revenues from asset management and performance fees we receive from third party managed funds and accounts, and investment income from our investments in these funds and accounts. These revenues are dependent upon the amount of assets under management and the performance of the funds and accounts. If these funds or accounts do not perform as well as our asset management clients expect, our clients may withdraw their assets from these funds and accounts, which would reduce our revenues. Some of our revenues are derived from our own investments in these funds and accounts. We experience significant fluctuations in our quarterly operating results due to the nature of our asset management business and therefore may fail to meet revenue expectations. Even in the absence of a market downturn, below market investment performance by our funds and portfolio managers could reduce asset management revenues and assets under management and result in reputational damage that might make it more difficult to attract new investors.
 
We face numerous risks and uncertainties as we expand our business.
 
We expect the growth of our business to come primarily from internal expansion and through acquisitions and strategic partnering. As we expand our business, there can be no assurance that our financial controls, the level and knowledge of our personnel, our operational abilities, our legal and compliance controls and our other corporate support systems will be adequate to manage our business and our growth. The ineffectiveness of any of these controls or systems could adversely affect our business and prospects. In addition, as we acquire new businesses and introduce new products, such as futures trading and the securitization of varying asset classes, we face numerous risks and uncertainties integrating their controls and systems into ours, including financial controls, accounting and data processing systems, management controls and other operations. A failure to integrate these systems and controls, and even an inefficient integration of these systems and controls, could adversely affect our business and prospects.
 
Our international operations subject us to numerous risks which could adversely impact our business in many ways.
 
Our business and operations are expanding globally, including the recent expansion of our business in Asia. As we operate in foreign countries, we are subject to legal, regulatory, political, economic and other inherent risks. The laws and regulations applicable to the securities and investment banking industries in these foreign countries differ. Our inability to remain in compliance with applicable laws and regulations in a particular country could have a significant and negative effect on our business and prospects in that country as well as in other countries. A political, economic or financial disruption in a country or region could adversely impact our business and increase volatility in financial markets generally.


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Extensive regulation of our business limits our activities, and, if we violate these regulations, we may be subject to significant penalties.
 
The securities industry is subject to extensive laws, rules and regulation in every country in which we operate. In addition, self-regulatory organizations and the securities exchanges, are actively involved in the regulation of broker-dealers. Securities firms are also subject to regulation by myriad regulatory bodies, securities commissions and attorneys general in those foreign jurisdictions and states in which they do business. Broker-dealers are subject to regulations that cover all aspects of the securities business, including sales and trading methods, trade practices among broker-dealers, use and safekeeping of customers’ funds and securities, capital structure of securities firms, antimoney laundering efforts, recordkeeping and the conduct of directors, officers and employees. Broker-dealers that engage in commodities and futures transactions are also subject to regulation by related agencies. All such regulatory agencies may conduct administrative proceedings that can result in censure, fine, suspension, expulsion of a broker-dealer or its officers or employees, or revocation of broker-dealer licenses. Additional legislation, changes in rules, changes in the interpretation or enforcement of existing laws and rules, or the entering into businesses that subject us to new rules and regulations may directly affect our mode of operation and our profitability. Furthermore, legislative or regulatory changes that increase capitalization requirements or impose leverage ratio requirements may adversely affect our ability to maintain or grow our business. Continued efforts by market regulators to increase transparency and reduce transaction costs for investors has affected and could continue to affect our trading revenue.
 
Legal liability may harm our business.
 
Many aspects of our business involve substantial risks of liability, and in the normal course of business, we have been named as a defendant or codefendant in lawsuits involving primarily claims for damages. The risks associated with potential legal liabilities often may be difficult to assess or quantify and their existence and magnitude often remain unknown for substantial periods of time. Jefferies Wealth Management involves an aspect of the business that has historically had more risk of litigation than our institutional business. Additionally, the expansion of our business, including increases in the number and size of investment banking transactions and our expansion into new areas, such as the municipal securities business, imposes greater risks of liability. In addition, unauthorized or illegal acts of our employees could result in substantial liability to us. Substantial legal liability could have a material adverse financial effect or cause us significant reputational harm, which in turn could seriously harm our business and our prospects.
 
Our business is subject to significant credit risk.
 
In the normal course of our businesses, we are involved in the execution, settlement and financing of various customer and principal securities and derivative transactions. These activities are transacted on a cash, margin or delivery-versus-payment basis and are subject to the risk of counterparty or customer nonperformance. Although transactions are generally collateralized by the underlying security or other securities, we still face the risks associated with changes in the market value of the collateral through settlement date or during the time when margin is extended and the risk of counterparty nonperformance to the extent collateral has not been secured or the counterparty defaults before collateral or margin can be adjusted. We may also incur credit risk in our derivative transactions to the extent such transactions result in uncollateralized credit exposure to our counterparties.
 
We seek to control the risk associated with these transactions by establishing and monitoring credit limits and by monitoring collateral and transaction levels daily. We may require counterparties to deposit additional collateral or return collateral pledged. In the case of aged securities failed to receive, we may, under industry regulations, purchase the underlying securities in the market and seek reimbursement for any losses from the counterparty.
 
Derivative transactions may expose us to unexpected risk and potential losses.
 
We are party to a large number of derivative transactions that require us to deliver to the counterparty the underlying security, loan or other obligation in order to receive payment. In a number of cases, we do not hold the underlying security, loan or other obligation and may have difficulty obtaining, or be unable to obtain, the underlying security, loan or other obligation through the physical settlement of other transactions. As a result, we


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are subject to the risk that we may not be able to obtain the security, loan or other obligation within the required contractual time frame for delivery. This could cause us to forfeit the payments due to us under these contracts or result in settlement delays with the attendant credit and operational risk as well as increased costs to the firm.
 
Item 1B.   Unresolved Staff Comments.
 
None.
 
Item 2.   Properties.
 
Our executive offices and principal administrative offices are located at 520 Madison Avenue, New York, New York under an operating lease arrangement. We maintain offices throughout the world including New York, Stamford, Jersey City, London, Hong Kong, and Los Angeles. In addition, we maintain backup facilities with redundant technologies in Jersey City, New Jersey and Stamford, Connecticut. We lease all of our office space, which management believes is adequate for our business. For information concerning leasehold improvements and rental expense, see notes 2 and 19 of the Notes to consolidated financial statements.
 
Item 3.   Legal Proceedings
 
Many aspects of our business involve substantial risks of legal liability. In the normal course of business, we have been named as defendants or codefendants in lawsuits involving primarily claims for damages. We are also involved in a number of judicial and regulatory matters arising out of the conduct of our business. Based on currently available information, we do not believe that any matter will have a material adverse effect on our financial condition, although, depending on our results for a particular period, an adverse determination could be material for a particular period.
 
Prior to February 2008, we bought and sold auction rate securities (“ARS”) for Jefferies Wealth Management clients and institutional customers that used our cash management desk. We did not underwrite or act as an auction agent for any issuer of ARS. A number of firms that underwrote ARS have entered into settlements with various regulators to, among other measures, purchase at par ARS sold to retail customers. We have provided information on our ARS transactions to the New York Attorney General, SEC and FINRA.
 
FINRA is currently conducting an investigation of our activities relating to ARS and has advised us that it has made a preliminary determination to bring an enforcement action against us alleging a number of violations of FINRA and SEC rules relating to our activities in ARS. In accordance with FINRA procedures, we have an opportunity to explain why we believe an action is not appropriate. If we are unable to explain why no such action should be brought or otherwise to reach a satisfactory resolution with FINRA, we intend to vigorously defend our position.
 
Item 4.   (Removed and Reserved)


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PART II
 
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Our common stock trades on the NYSE under the symbol JEF. The following table sets forth for the periods indicated the range of high and low sales prices per share of our common stock as reported by the NYSE.
 
                 
    High   Low
 
2010
               
Fourth Quarter
  $ 26.16     $ 22.03  
Third Quarter
    25.88       20.15  
Second Quarter(1)
    28.44       21.37  
First Quarter(1)
    27.72       23.65  
2009
               
Fourth Quarter
  $ 30.99     $ 22.12  
Third Quarter
    27.60       17.82  
Second Quarter
    22.63       13.28  
First Quarter
    15.28       8.04  
 
 
(1) The first and second quarters of 2010 include the high and low sales prices of our common stock during the month of March.
 
There were approximately 1,600 holders of record of our common stock at January 3, 2011. Our transfer agent is American Stock Transfer & Trust Company, LLC and their address is 59 Maiden Lane, Plaza Level, New York, NY 10038.
 
The only restrictions on our present ability to pay dividends on our common stock are the dividend preference terms of our Series A convertible preferred stock and the governing provisions of the Delaware General Corporation Law.
 
Cash dividends per share of common stock (declared):
 
                                 
    First
  Second
  Third
  Fourth
    Quarter   Quarter   Quarter   Quarter
 
2010
  $ 0.075     $ 0.075     $ 0.075     $ 0.075  
2009
                       
 
On December 17, 2010, our Board of Directors declared a quarterly dividend of $0.075 in cash per share of common stock payable on February 15, 2011 to stockholders of record as of January 17, 2011.
 
Issuer Purchases of Equity Securities
 
                                 
                (c) Total Number of
    (d) Maximum Number
 
    (a) Total
          Shares Purchased as
    of Shares that May
 
    Number of
    (b) Average
    Part of Publicly
    Yet Be Purchased
 
    Shares
    Price Paid
    Announced Plans or
    Under the Plans or
 
Period   Purchased(1)     per Share     Programs(2)     Programs  
 
September 1 — September 30, 2010
    24,313       23.19             10,975,010  
October 1 — October 31, 2010
    997,862       21.28       975,010       10,000,000  
November 1 — November 30, 2010
    59,833       24.91             10,000,000  
                                 
Total
    1,082,008               975,010          
                                 
 
 
(1) We repurchased an aggregate of 106,998 shares other than as part of a publicly announced plan or program. We repurchased these securities in connection with our stock compensation plans which allow participants to use shares to pay the exercise price of certain options exercised and to use shares to satisfy certain tax liabilities arising from the exercise of options or the vesting of restricted stock. The number above does not include unvested shares forfeited back to us pursuant to the terms of our stock compensation plans.
 
(2) On December 14, 2009 we announced the authorization by our Board of Directors of the repurchase, from time to time, of up to an aggregate of 15,000,000 shares of our common stock, inclusive of prior authorizations.


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Shareholder Return Performance Presentation
 
Set forth below is a line graph comparing the yearly change in the cumulative total shareholder return on our common stock, after consideration of all relevant stock splits during the period, against the cumulative total return of the Standard & Poor’s 500 and Standard & Poor’s 500 Financials Indices for the period of five fiscal years, commencing January 1, 2006 (based on prices at December 31, 2005), and ending November 30, 2010 (current period includes the eleven months ended November 30, 2010) (normalized so that the value of our common stock and each index was $100 on December 31, 2005).
 
(PERFORMANCE GRAPH)
 
                                                             
      2005     2006     2007     2008     2009     2010
Jefferies Group, Inc. 
      100         121         106         66         111         114  
S&P 500
      100         116         122         77         97         105  
S&P 500 Financials
      100         119         97         43         51         52  
                                                             


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Item 6.   Selected Financial Data.
 
The selected data presented below as of and for the eleven months ended November 30, 2010 and each of the years in the four year period ended December 31, 2009, 2008, 2007 and 2006 are derived from the Consolidated Financial Statements of Jefferies Group, Inc. and its subsidiaries. The data should be read in connection with the Consolidated Financial Statements including the related notes included in Item 8 of this Transition Report on Form 10-K. On April 18, 2006, we declared a 2 for 1 split of all outstanding shares of common stock, payable May 15, 2006 to stockholders of record as of April 28, 2006. The stock split was effected as a stock dividend of one share for each one share outstanding on the record date. All share, share price and per share information has been restated to retroactively reflect the effect of the two for one stock split. Certain reclassifications have been made to the prior period amounts to conform to the current period’s presentation. Certain correcting adjustments (hereafter


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referred to as “adjustments”) have been made to the prior period amounts as discussed on pages 16-21 of Item 7. Management’s Discussion and Analysis and as discussed in Footnote 1 to the Consolidated Financial Statements.
 
                                         
    Eleven
                         
    Months Ended
                         
    November 30,
    Twelve Months Ended December 31,  
    2010     2009     2008     2007     2006  
          (In Thousands , Except Per Share Amounts )        
 
Earnings Statement Data
                                       
Revenues:
                                       
Commissions
  $ 466,246     $ 512,293     $ 611,823     $ 524,716     $ 439,456  
Principal transactions
    509,070       838,396       (80,479 )     221,259       309,227  
Investment banking
    890,334       474,315       425,887       750,192       540,596  
Asset management fees and investment income (loss)from managed funds
    16,785       35,887       (52,929 )     23,534       109,550  
Interest
    852,494       732,250       741,559       1,174,512       528,428  
Other
    62,417       38,918       28,573       24,311       35,497  
                                         
Total revenues
    2,797,346       2,632,059       1,674,434       2,718,524       1,962,754  
Interest expense
    605,096       468,798       660,448       1,150,779       505,573  
                                         
Net revenues
    2,192,250       2,163,261       1,013,986       1,567,745       1,457,181  
Interest on mandatorily redeemable preferred interest of consolidated subsidiaries
    14,916       37,248       (69,077 )     4,257        
                                         
Net revenues, less mandatorily redeemable preferred interest
    2,177,334       2,126,013       1,083,063       1,563,488       1,457,181  
                                         
Non-interest expenses :
                                       
Compensation and benefits
    1,282,644       1,195,971       1,522,157       946,309       791,255  
Floor brokerage and clearing fees
    110,835       80,969       64,834       66,967       59,611  
Technology and communications
    160,987       141,233       127,357       103,763       80,840  
Occupancy and equipment rental
    68,085       72,824       76,255       76,765       59,792  
Business development
    62,015       37,614       49,376       56,594       48,634  
Professional services
    49,080       41,125       46,948       41,133       36,859  
Other
    47,017       48,530       84,296       30,843       31,977  
                                         
Total non-interest expenses
    1,780,663       1,618,266       1,971,223       1,322,374       1,108,968  
                                         
Earnings (loss)before income taxes and cumulative effect of change in accounting principle
    396,671       507,747       (888,160 )     241,114       348,213  
Income taxes
    156,404       195,928       (293,359 )     93,032       137,356  
                                         
Earnings (loss)before cumulative effect of change in accounting principle, net
    240,267       311,819       (594,801 )     148,082       210,857  
Cumulative effect of change in accounting principle, net
                            1,606  
                                         
Net earnings (loss)
    240,267       311,819       (594,801 )     148,082       212,463  
Net earnings (loss)to noncontrolling interest
    16,601       36,537       (53,884 )     3,634       6,969  
                                         
Net earnings (loss)to common shareholders
  $ 223,666     $ 275,282     $ (540,917 )   $ 144,448     $ 205,494  
                                         
Earnings per common share:
                                       
Basic-
                                       
Earnings (loss)before cumulative effect of change in accounting principle, net
  $ 1.10     $ 1.36     $ (3.30 )   $ 0.93     $ 1.37  
Cumulative effect of change in accounting principle, net
                            0.01  
                                         
Net earnings (loss)per common share
  $ 1.10     $ 1.36     $ (3.30 )   $ 0.93     $ 1.38  
                                         
Diluted-
                                       
Earnings (loss) before cumulative effect of change in accounting principle, net
  $ 1.09     $ 1.35     $ (3.30 )   $ 0.92     $ 1.35  
Cumulative effect of change in accounting principle, net
                            0.01  
                                         
Net earnings (loss)per common share
  $ 1.09     $ 1.35     $ (3.30 )   $ 0.92     $ 1.36  
                                         
Weighted average common shares :
                                       
Basic
    196,393       200,446       166,163       141,515       133,898  
Diluted
    200,511       204,572       166,163       141,903       138,670  
Cash dividends per common share
  $ 0.30           $ 0.25     $ 0.50     $ 0.42  
Selected Balance Sheet Data
                                       
Total assets
  $ 36,726,543     $ 28,121,023     $ 19,978,685     $ 29,793,817     $ 17,825,457  
Long-term debt
  $ 3,778,681     $ 2,729,117     $ 1,764,274     $ 1,764,067     $ 1,168,562  
Mandatorily redeemable convertible preferred stock
  $ 125,000     $ 125,000     $ 125,000     $ 125,000     $ 125,000  
Mandatorily redeemable preferred interest of consolidated subsidiaries
  $ 315,885     $ 318,047     $ 280,923     $ 354,316        
Total common stockholders’ equity
  $ 2,477,989     $ 2,298,140     $ 2,115,583     $ 1,760,645     $ 1,580,831  
Shares outstanding
    171,694       165,638       163,216       124,453       119,547  
Other Data (Unaudited)
                                       
Common book value per share (1)
  $ 14.43     $ 13.87     $ 12.96     $ 14.15     $ 13.22  
 
(1) See “Analysis of Financial Condition and Capital Resources” in Item 7 of this Transition Report on Form 10-K for further information regarding our book value and stockholders’ equity.


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JEFFERIES GROUP, INC AND SUBSIDIARIES
 
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
This report contains or incorporates by reference “forward looking statements” within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward looking statements include statements about our future and statements that are not historical facts. These forward looking statements are usually preceded by the words “believe,” “intend,” “may,” “will,” or similar expressions. Forward looking statements may contain expectations regarding revenues, earnings, operations and other financial projections, and may include statements of future performance, plans and objectives. Forward looking statements also include statements pertaining to our strategies for future development of our business and products. Forward looking statements represent only our belief regarding future events, many of which by their nature are inherently uncertain. It is possible that the actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. Information regarding important factors that could cause actual results to differ, perhaps materially, from those in our forward looking statements is contained in this report and other documents we file. You should read and interpret any forward looking statement together with these documents, including the following:
 
  •  the description of our business contained in this report under the caption “Business”;
 
  •  the risk factors contained in this report under the caption “Risk Factors”;
 
  •  the discussion of our analysis of financial condition and results of operations contained in this report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;
 
  •  the discussion of our risk management policies, procedures and methodologies contained in this report under the caption “Risk Management” included within Management’s Discussion and Analysis of Financial Condition and Results of Operations;
 
  •  the notes to the consolidated financial statements contained in this report; and
 
  •  cautionary statements we make in our public documents, reports and announcements.
 
Any forward looking statement speaks only as of the date on which that statement is made. We will not update any forward looking statement to reflect events or circumstances that occur after the date on which the statement is made.
 
Consolidated Results of Operations
 
On April 19, 2010, our Board of Directors approved a change to our fiscal year end from a calendar year basis to a fiscal year ending November 30 because we believe that a change in fiscal year has several potential benefits, including operational and managerial efficiencies, funding accessibility, potential trading opportunities, increased visibility and heightened brand recognition. Our 2010 fiscal year therefore consists of the eleven month transition period beginning January 1, 2010 through November 30, 2010. Financial statements for 2009 and 2008 continue to be presented on the basis of our previous calendar year end.


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
The following table provides an overview of our consolidated results of operations:
 
                         
    Eleven Months
             
    Ended
    Twelve Months Ended
 
    November 30,
    December 31,  
    2010     2009     2008  
    (Dollars in thousands, except for per share amounts)  
 
Net revenues, less mandatorily redeemable preferred interest
  $ 2,177,334     $ 2,126,013     $ 1,083,063  
Non-interest expenses
    1,780,663       1,618,266       1,971,223  
Earnings (loss) before income taxes
    396,671       507,747       (888,160 )
Income tax expense (benefit)
    156,404       195,928       (293,359 )
Net earnings (loss)
    240,267       311,819       (594,801 )
Net earnings (loss) to noncontrolling interests
    16,601       36,537       (53,884 )
Net earnings (loss) to common shareholders
    223,666       275,282       (540,917 )
Earnings (loss) per diluted common share
  $ 1.09     $ 1.35     $ (3.30 )
                         
Effective tax rate
    39 %     39 %     33 %
 
As discussed further below, we are making certain adjustments to our historical financial statements for the quarters of 2010 and 2009 and for the years of 2009 and 2008, as well as to other selected financial data for the years 2007 and 2006. We do not believe these discrete adjustments are material individually or in the aggregate to our financial condition or our financial results for any reported period.
 
The first adjustment relates to a difference between our records and the final statement of our clearing bank involving a portion of our fixed income business that we are now self-clearing (see our Current Report on Form 8-K, dated December 20, 2010). We have determined that the bank’s statement is correct and that the difference (which, on a pre-tax basis, is $20.9 million during the eleven months ended November 30, 2010 and $13.6 million across various periods from 2005-2009) is attributed to items that we incorrectly recorded with respect to Principal transaction revenue on certain mortgage-backed securities, coupon interest, other settlements, clearing fees and financing charges and client bad debts. These errors impact Net earnings, Total assets and Total liabilities, and accordingly, Total stockholders’ equity in various periods from 2005 to 2010. We will also adjust the compensation based on a portion of the related revenue. We do not believe these adjustments are material individually or in the aggregate to our financial condition or our financial results for any reported period.
 
In addition to the first adjustment described above and separately from them, we are adjusting Interest revenues and Interest expense in the respective financial statement line items to be reflected on a gross rather than net basis for $247.9 million in 2010 and $166.9 million in 2009. Such adjustments relate to Interest revenues and Interest expense on inventory within our fixed income and securities finance businesses. Although Interest revenues and Interest expense were recorded on a net basis to Interest revenues, thereby resulting in an understatement in Interest revenues and Interest Expense for various periods, there was no impact on Net revenues or Net earnings. We do not believe these adjustments are material individually or in the aggregate to our financial condition or our financial results for any reported period.
 
Finally, we are eliminating Securities received as collateral and an equal and offsetting Obligation to return securities received as collateral at December 31, 2009 for $68.5 million, which was recorded in error but which had no effect on Total stockholders’ equity and no material effect on Total assets or Total liabilities. We do not believe these adjustments are material individually or in the aggregate to our financial condition or our financial results for any reported period.


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
The following tables sets forth the effects of the adjustments on Net income, on an after tax basis, for the years ended December 31, 2009, 2008, 2007 and 2006 and for the quarterly periods in 2010 and 2009. Although the eleven months November 30, 2010 is not adjusted, this information was previously provided in our current report on Form 8-K filed on December 20, 2010, and therefore is included as part of this information.
 
                                         
    Eleven Months
                         
    Ended
                         
    November 30,
    Twelve Months Ended December 31,  
Increase (decrease) in Net earnings (loss) to common shareholders   2010     2009     2008     2007     2006  
    (In thousands)  
 
Previously reported Net earnings (loss) to common shareholders
  $ 235,512     $ 280,043     $ (536,128 )   $ 144,665     $ 205,750  
Netting of interest revenue and expense
                             
Differences with clearing bank
    (9,631 )     (3,513 )     (4,497 )     5       8  
Other items(1)
    (2,215 )     (1,248 )     (292 )     (222 )     (264 )
                                         
Total adjustments
    (11,846 )     (4,761 )     (4,789 )     (217 )     (256 )
                                         
Adjusted Net earnings (loss) to common shareholders
  $ 223,666     $ 275,282     $ (540,917 )   $ 144,448     $ 205,494  
 
 
(1) Other items — Includes the effect of certain other immaterial adjustments.
 
                                                         
    Three Months Ended  
    August 31,
    May 31,
    March 31,
    December 31,
    September 30,
    June 30,
    March 31,
 
Increase (decrease) in Net earnings to common shareholders   2010     2010     2010     2009     2009     2009     2009  
    (In thousands)  
 
Previously reported Net earnings to common shareholders
  $ 46,256     $ 84,832     $ 74,066     $ 93,520     $ 86,286     $ 61,900     $ 38,337  
Netting of interest revenues and expense
                                         
Differences with clearing bank
    (1,738 )     (766 )     (1,288 )     (972 )     (1,041 )     (1,004 )     (496 )
Other items(1)
    236       (240 )     (634 )     60       (909 )     (730 )     331  
                                                         
Total adjustments
    (1,502 )     (1,006 )     (1,922 )     (912 )     (1,950 )     (1,734 )     (165 )
                                                         
Adjusted Net earnings to common shareholders
  $ 44,754     $ 83,826     $ 72,144     $ 92,608     $ 84,336     $ 60,166     $ 38,172  
 
 
(1) Other items — Includes the effect of certain other immaterial adjustments.


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
 
The following tables set forth the effects of the adjustments on affected line items within our previously reported Consolidated Statements of Earnings for the years 2009 and 2008 and our Consolidated Statements of Financial Condition as of December 31, 2009. Although the eleven months ended November 30, 2010 is not adjusted, this information was previously provided in our current report on Form 8-K filed on December 20, 2010, and therefore is included as part of this information.
 
                                                 
    Eleven Months Ended
       
    November 30,     Twelve Months Ended December 31,  
    2010     2009     2008  
    As
          As
          As
       
    Previously
          Previously
          Previously
       
    Reported     Adjusted     Reported     Adjusted     Reported     Adjusted  
    (In thousands)  
 
Principal transactions
  $ 529,815     $ 509,070     $ 843,851     $ 838,396     $ (80,192 )   $ (80,479 )
Interest
    605,945       852,494       567,438       732,250       749,577       741,559  
Total revenues
    2,571,541       2,797,346       2,472,702       2,632,059       1,682,739       1,674,434  
Interest expense
    357,194       605,096       301,925       468,798       660,964       660,448  
Net revenues
    2,214,347       2,192,250       2,170,777       2,163,261       1,021,775       1,013,986  
Net revenues, less mandatorily redeemable preferred interest
    2,199,431       2,177,334       2,133,529       2,126,013       1,090,852       1,083,063  
Compensation and benefits
    1,284,768       1,282,644       1,195,971       1,195,971       1,522,157       1,522,157  
Floor brokerage and clearing fees
    110,705       110,835       80,611       80,969       64,724       64,834  
Total non-interest expenses
    1,782,657       1,780,663       1,617,908       1,618,266       1,971,113       1,971,223  
Earnings (loss) before income taxes
    416,774       396,671       515,621       507,747       (880,261 )     (888,160 )
Income tax expense (benefit)
    164,661       156,404       199,041       195,928       (290,249 )     (293,359 )
Net earnings (loss)
    252,113       240,267       316,580       311,819       (590,012 )     (594,801 )
Net earnings (loss) to common shareholders
    235,512       223,666       280,043       275,282       (536,128 )     (540,917 )
Earnings (loss) per common share:
                                               
Basic
  $ 1.16     $ 1.10     $ 1.39     $ 1.36     $ (3.27 )   $ (3.30 )
Diluted
  $ 1.15     $ 1.09     $ 1.38     $ 1.35     $ (3.27 )   $ (3.30 )
 
The impact of the adjustments were as follows:
 
  •  To reduce Principal transactions revenue by $11.8 million for trading revenue realized on certain mortgage-backed securities in 2010, 2009 and 2008.
 
  •  To reduce Principal transactions revenue by $13.8 million in 2010 for remaining unreconciled differences between our records and our clearing bank.
 
  •  To reduce Principal transactions revenue by $900,000 for client bad debts on mortgage-backed securities settlements not collected from counterparties in 2009 and 2008.
 
  •  To increase Interest income by $7.5 million for coupon interest on mortgage-backed securities in 2008.
 
  •  To reduce Interest income by $4.8 million for improper accruals of interest on emerging markets inventory in 2010, 2009 and 2008.


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
 
  •  To increase Interest income by $247.9 million and $166.9 million in order to reflect interest on a gross basis rather than net for various inventory positions in 2010 and 2009, respectively.
 
  •  To increase Interest expense by $247.9 million and $166.9 million in order to reflect interest on a gross basis rather than net for various inventory positions in 2010 and 2009.
 
  •  To increase Interest expense by $300,000 for financing charges from our clearing bank not recorded in 2009 and 2008.
 
  •  To reduce Interest expense by $900,000 for repurchase agreement interest expense improperly accrued in 2008.
 
  •  To reduce Compensation and benefits by $2.0 million in 2010 as it relates to the reduction in revenues generated by the mortgage-backed securities business and for other charges in 2010 not included in our preliminary results as reported in our Current Report on Form 10-K, dated December 20, 2010.
 
  •  To increase clearing and brokerage fees by $1.1 million for clearing ticket charges from our clearing bank not recorded in 2009 and 2008To reduce Income tax expense in 2010 and 2009 and to increase Income tax benefit in 2008 for the associated tax effect of the above items by $8.3 million, $3.1 million and $3.1 million, respectively.
 
                 
    December 31, 2009  
    As Previously
       
    Reported     Adjusted  
    (In thousands)  
 
Assets
               
Securities received as collateral
  $ 68,494     $  
Other assets
    488,789       489,035  
Total assets
    28,189,271       28,121,023  
Liabilities
               
Obligation to return securities received as collateral
    68,494        
Payables:
               
Brokers, dealers and clearing organizations
    889,687       905,350  
Accrued expenses and other liabilities
    941,210       936,242  
Total liabilities
    25,559,144       25,501,345  
Stockholders’ equity
               
Retained earnings(1)
    698,488       688,039  
Total common stockholders’ equity
    2,308,589       2,298,140  
Total stockholders’ equity
    2,630,127       2,619,678  
Total liabilities and stockholders’ equity
    28,189,271       28,121,023  
 
 
(1) The balance of Retained earnings as of January 1, 2009 has been adjusted from the amount presented in previously reported financial statements due to adjustments of $5.7 million, on an after tax basis, for differences identified between our records and the records of our clearing bank and for other items.
 
The impact of the adjustments were as follows:
 
  •  To increase Payables to brokers, dealers and clearing organizations as of November 30, 2010 and December 31, 2009 related to our reconciling differences identified (and outlined above) with our clearing bank.
 
  •  To increase Payables to brokers, dealers and clearing organizations for settlements of to-be-announced securities as of November 30, 2010 and for the incorrect accrual of interest on repurchase agreements and mortgage-backed securities coupon at December 31, 2009.


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
 
  •  To reduce Securities received as collateral and Obligation to return securities received as collateral for collateral arrangements recorded in error as of December 31, 2009.
 
  •  To reduce Accrued expenses and other liabilities for the impact of compensation adjustments at November 30, 2010 and the related tax effects of the above items at November 30, 2010 and December 31, 2009.
 
The following tables set forth the effects of the adjustments on major caption items within our Consolidated Statement of Earnings for the quarters in 2010 and 2009.
 
                                                 
    Three Months Ended  
    August 31, 2010     May 31, 2010     March 31, 2010  
    As Previously
          As Previously
          As Previously
       
    Reported     Adjusted     Reported     Adjusted     Reported     Adjusted  
    (In thousands)  
 
Principal transactions
  $ 74,282     $ 71,044     $ 155,581     $ 153,986     $ 152,546     $ 150,380  
Interest
    152,546       239,557       150,187       243,183       150,020       218,935  
Total revenues
    609,257       693,030       740,640       832,041       658,619       725,368  
Interest expense
    89,159       175,761       71,110       164,504       75,377       145,313  
Net revenues
    520,098       517,269       669,530       667,536       583,242       580,055  
Net revenues, less mandatorily redeemable preferred interest
    522,635       519,806       667,512       665,518       581,194       578,007  
Floor brokerage and clearing fees
    30,244       30,111       35,849       35,508       30,730       30,637  
Total non-interest expenses
    443,441       443,308       522,179       521,838       455,644       455,551  
Earnings before income taxes
    79,194       76,498       145,333       143,680       125,550       122,456  
Income tax expense
    35,067       33,873       56,836       56,189       47,541       46,369  
Net earnings
    44,127       42,625       88,497       87,491       78,009       76,087  
Net earnings to common shareholders
    46,256       44,754       84,832       83,826       74,066       72,144  
Earnings per common share:
                                               
Basic
  $ 0.23     $ 0.22     $ 0.42     $ 0.41     $ 0.36     $ 0.35  
Diluted
  $ 0.23     $ 0.22     $ 0.41     $ 0.41     $ 0.36     $ 0.35  
 


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
                                                                 
    Three Months Ended  
    December 31, 2009     September 30, 2009     June 30, 2009     March 31, 2009  
    As
          As
          As
          As
       
    Previously
          Previously
          Previously
          Previously
       
    Reported     Adjusted     Reported     Adjusted     Reported     Adjusted     Reported     Adjusted  
    (In thousands)  
 
Principal transactions
  $ 132,685     $ 130,806     $ 338,552     $ 337,042     $ 250,236     $ 248,934     $ 122,376     $ 121,612  
Interest
    153,661       201,121       161,091       210,436       150,599       186,442       102,087       134,251  
Total revenues
    622,045       667,626       777,177       825,012       667,576       702,117       405,904       437,304  
Interest expense
    83,839       131,194       76,756       127,558       77,383       114,436       63,947       95,611  
Net revenues
    538,206       536,432       700,421       697,454       590,193       587,681       341,957       341,693  
Net revenues, less mandatorily redeemable preferred interest
    531,578       529,804       676,825       673,858       577,866       575,354       347,260       346,996  
Floor brokerage and clearing fees
    26,414       26,288       20,677       20,817       19,628       19,983       13,891       13,879  
Total non-interest expenses
    362,497       362,371       501,795       501,935       455,538       455,893       298,078       298,066  
Earnings before income taxes
    169,081       167,433       175,030       171,923       122,328       119,461       49,182       48,930  
Income tax expense
    68,742       68,006       65,210       64,053       48,333       47,200       16,756       16,669  
Net earnings
    100,339       99,427       109,820       107,870       73,995       72,261       32,426       32,261  
Net earnings to common shareholders’
    93,520       92,608       86,286       84,336       61,900       60,166       38,337       38,172  
Earnings per common share:
                                                               
Basic
  $ 0.47     $ 0.46     $ 0.42     $ 0.42     $ 0.31     $ 0.30     $ 0.19     $ 0.19  
Diluted
  $ 0.46     $ 0.46     $ 0.42     $ 0.41     $ 0.30     $ 0.30     $ 0.19     $ 0.19  
 
Executive Summary
 
Net revenues, less mandatorily redeemable preferred interest, for the eleven months ended November 30, 2010 increased 2% to a record $2,177.3 million as compared to $2,126.0 million for the twelve months ended December 31, 2009 primarily due to higher investment banking results, partially offset by lower sales and trading results over the periods. Non-interest expenses of $1,780.7 million for the eleven months ended November 30, 2010 reflected a 10% increase over the 2009 period primarily attributable to increased compensation and benefits costs, floor brokerage and clearing fees, technology and communications expenses and business development expenses. Compensation costs for the eleven month period ended November 30, 2010 were 59% of net revenues as compared to 55% for the twelve months ended December 31, 2009. Non-interest expenses for the eleven months ended November 30, 2010 also included our $6.8 million donation to various Haiti earthquake charities.
 
Net revenues, less mandatorily redeemable preferred interest, for 2009 increased 96% to $2,126.0 million as compared to $1,083.1 million for 2008 due to substantial increases in revenues across almost all product areas. Non-interest expenses of $1,618.3 million for 2009 reflected a decrease of 18% over the comparable 2008 period primarily attributable to decreases in compensation and benefit costs and other expenses, which included certain significant items in 2008, partially offset by increases in floor brokerage and clearing fees and technology and communications expenses.
 
The effective tax rate was 39% for the eleven months ended November 30, 2010 and 39% for 2009. The effective tax rate of 39% for 2009 was an increase in comparison to an effective tax rate of 33% for 2008.
 
Effective June 18, 2009, Jefferies & Company, our wholly owned subsidiary and a U.S. registered broker-dealer, was designated a Primary Dealer by the Federal Reserve Bank of New York (“FRBNY”). As a Primary Dealer, Jefferies & Company is a counterparty to the FRBNY in its open market operations, participates directly in U.S. Treasury auctions and provides market information and analysis to the trading desks at the FRBNY. Similarly, during the second half of 2009 and first half of 2010, Jefferies International Limited, our wholly owned subsidiary and a U.K. regulated broker-dealer, was designated in similar capacities for government bond issues in the United Kingdom, Germany, the Netherlands, Portugal and Austria, further expanding our global rates business.

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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
At November 30, 2010, we had 3,084 employees globally, compared to 2,628 at December 31, 2009 and 2,270 at December 31, 2008.
 
Our business, by its nature, does not produce predictable or necessarily recurring earnings. Our results in any given period can be materially affected by conditions in global financial markets, economic conditions generally and our own activities and positions. For a further discussion of the factors that may affect our future operating results, see “Risk Factors” in Part I, Item IA of this Transition Report on Form 10-K for the eleven months ended November 30, 2010.
 
Revenues by Source
 
The Capital Markets reportable segment includes our securities trading activities and our investment banking and capital raising activities. The Capital Markets reportable segment is managed as a single operating segment that provides the sales, trading and origination effort for various equity, fixed income and advisory services. The Capital Markets segment comprises many businesses, with many interactions among them. In addition, we separately discuss our Asset Management business.
 
For presentation purposes, the remainder of “Results of Operations” is presented on a detailed product and expense basis rather than on a business segment basis. Net revenues presented for our equity and fixed income businesses include allocations of interest income and interest expense as we assess the profitability of these businesses inclusive of the net interest revenue or expense associated with the respective sales and trading activities, which is a function of the mix of each business’ associated assets and liabilities and the related funding costs. Prior to the first quarter of 2010, we separately presented revenues attributed from our high yield business within our “Revenues by Source” statement. As our firm has continued to expand, particularly geographically, in the first quarter we began to integrate our high yield platforms within our overall fixed income business and now present our high yield net revenue within fixed income net revenue as of the first quarter of 2010. Reclassifications have been made to our previous presentation of “Revenues by Source” for the twelve months ended December 31, 2009 and 2008 to conform to the current presentation.


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
The composition of our net revenues has varied over time as financial markets and the scope of our operations have changed. The composition of net revenues can also vary from period to period due to fluctuations in economic and market conditions and our own performance. The following provides a summary of “Revenues by Source” for the eleven months ended November 30, 2010 and twelve months ended December 31, 2009 and 2008 (in thousands):
 
                                                 
    Eleven Months Ended
             
    November 30,
    Twelve Months Ended December 31,  
    2010     2009     2008  
          % of Net
          % of Net
          % of Net
 
    Amount     Revenues     Amount     Revenues     Amount     Revenues  
 
Equities
  $ 522,914       24 %   $ 468,161       22 %   $ 529,709       52 %
Fixed income
    762,217       35       1,177,226       54       111,319       11  
Other
                7,672       1              
                                                 
Total sales and trading
    1,285,131       59       1,653,059       77       641,028       63  
Equity
    126,363       6       89,807       4       62,396       6  
Debt
    347,471       16       193,187       9       55,266       5  
                                                 
Capital markets
    473,834       22       282,994       13       117,662       12  
Advisory
    416,500       19       191,321       9       308,225       30  
                                                 
Investment banking
    890,334       41       474,315       22       425,887       42  
Asset management fees and investment income (loss) from managed funds:
                                               
Asset management fees
    16,519       1       28,512       1       19,612       2  
Investment income (loss) from managed funds
    266             7,375             (72,541 )     (7 )
                                                 
Total
    16,785       1       35,887       1       (52,929 )     (5 )
                                                 
Net revenues
    2,192,250       100 %     2,163,261       100 %     1,013,986       100 %
Interest on mandatorily redeemable preferred interest of consolidated subsidiaries
    14,916               37,248               (69,077 )        
                                                 
Net revenues, less mandatorily redeemable preferred interest
  $ 2,177,334             $ 2,126,013             $ 1,083,063          
                                                 
 
Net Revenues
 
2010 v. 2009 — Net revenues, before interest on mandatorily redeemable preferred interests, for the eleven months ended November 30, 2010 were a record $2,192.3 million, an increase of 1% over previous record 2009 net revenues of $2,163.3 million. The increase was primarily due to an increase of 88% in investment banking revenues to a record $890.3 million for fiscal 2010, and a 12% increase in equities sales and trading revenues from the 2009 year. These increases were partially offset by a 35% decline in fixed income revenues and a 53% decline in asset management revenues as compared with the prior year. Net revenues for the twelve months ended December 31, 2009 also included a gain on extinguishment of debt of $7.7 million as we repurchased approximately $20.3 million of our outstanding long-term debt during 2009.
 
2009 v. 2008 — Net revenues, before interest on mandatorily redeemable preferred interests, for the year ended December 31, 2009 were $2,163.3 million, more than double 2008 net revenues of $1,014.0 million. The increase was primarily due to increases of 958% in fixed income revenues, 11% in investment banking revenues and


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
168% in asset management revenues as we enhanced and developed our diversified businesses throughout 2009, partially offset by a 12% decline in equities revenues as compared with the prior year.
 
Interest on mandatorily redeemable preferred interests of consolidated subsidiaries represents the allocation of earnings and losses from our consolidated high yield business to third party noncontrolling interest holders invested in that business through mandatorily redeemable preferred securities.
 
The following reflects the number of trading days in the respective operational periods:
 
         
Eleven Months
  Twelve Months
  Twelve Months
Ended
  Ended
  Ended
November 30, 2010   December 31, 2009   December 31, 2008
 
230 days
  252 days   253 days
 
Equities Revenue
 
Equities revenue is comprised of equity commissions and principal transactions revenue, correspondent clearing, prime brokerage services, electronic trading and execution product revenues and alternative investment revenues.
 
2010 v. 2009 — Total equities revenue was $522.9 million and $468.2 million, respectively, in fiscal 2010 and in 2009, a 12% increase from 2009. This increase in was primarily due to positive block trading opportunities, higher alternative investment revenues and enhanced results from certain strategic investment strategies. Growth in our international equities platform, an increased client base and balances in our prime brokerage business and stronger revenue generated by our equity derivative business with greater market volatility also contributed to an increase in equities revenue for 2010 over the prior period. Increases in equities revenue from these businesses was partially offset by a decline in revenues generated by our cash equities business, which was affected by reduced client volumes for the eleven month 2010 period consistent with lower overall trading volumes experienced by the major exchanges.
 
In November 2010, we entered into an agreement to sell certain correspondent broker accounts and assign the related clearing arrangements. The purchase price is dependent on the number and amount of client accounts that convert to the purchaser’s platform for which a final determination will be made during our fiscal 2011 third quarter. Equities revenues for the eleven months ended November 30, 2010 do not include any gain from transaction, which will be recognized upon final closing in fiscal 2011. Revenue from the sale of the accounts is not expected to be material to equities revenue and revenues from our correspondent clearing business were not significant to total equities revenues for the eleven months ended November 30, 2010 or the twelve months ended December 31, 2009.
 
2009 v. 2008 — Total equities revenue was $468.2 million and $529.7 million, respectively, in 2009 and 2008, representing a 12% decrease from 2008. The decrease in 2009 equities revenue as compared to 2008 was primarily driven by declines in revenues from our U.S. cash equities and securities lending businesses and declines in the trading results from certain principal equity trading strategies, which performed particularly well given market volatility in 2008. The decrease in revenues generated by our cash equities business is reflective of a decrease in customer trading volume, some of which reflects the direction of customer flow to electronic trading activities, and the decline in revenues generated by our securities lending business is primarily attributed to the low short term interest rates prevailing throughout the year. Revenues from prime brokerage services and electronic trading activities were up as compared to 2008 as market share and customer balances continued to grow. Equities revenues in 2008 were negatively impacted by writedowns on certain equity block trading activities due to the sharp overall decline in the equity markets and losses on our equity method investment in Jefferies Finance, LLC, which performed markedly better in 2009.
 
Fixed Income Revenue
 
Fixed income revenue primarily includes commissions, principal transactions and net interest revenue from investment grade corporate bonds, mortgage- and asset-backed securities, government and agency securities,


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
municipal bonds, emerging markets debt, convertible securities, high yield and distressed securities, bank loans and commodities trading activities.
 
2010 v. 2009 — Fixed income market conditions during the eleven months ended November 30, 2010 were characterized by tightening bid offer spreads and Treasury yields as well as concerns over world economic conditions, particularly in the Eurozone. This is compared with fixed income market conditions for the twelve months ended December 31, 2009 which were more favorable for fixed income trading, including widening spreads, and a more favorable competitive landscape. This impact on the broad fixed income markets was partially offset by an improved market for high new issues of fixed income securities, particularly in the latter part of fiscal 2010. Fixed income revenue for the eleven month period ended November 30, 2010 as compared to the twelve months ended December 31, 2009 reflects the impact of the change in market conditions.
 
Fixed income revenue was $762.2 million for the eleven months ended November 30, 2010, down 35% from revenue of $1,177.2 million for the twelve months ended December 31, 2009. The decrease in revenue for fiscal 2010 reflects the challenging market conditions given economic disruption in certain world markets and the continued tightening of corporate bond and Treasury spreads. These factors had a dampening effect on customer flow across several of our fixed income businesses although improvement in overall volumes began in the fourth quarter of 2010 from the more recent quarterly periods. The decline in revenue for the 2010 period as compared to the 2009 period is largely attributed to declines in revenue from our corporate bond, U.S. government and agencies, mortgage-backed securities, emerging markets debt and convertible securities and bank loan trading activities as well as reduced revenues from certain principal transaction trading opportunities. The decline in revenue contributions was partially offset by revenue contributions for the eleven months ended November 30, 2010 from our European government bond trading business, which had commenced operations in the latter part of 2009 and significantly expanded its platform in Europe in the early part of 2010, and improved revenue results from our high yield and commodities sales and trading activities as compared to the 2009 period.
 
Revenues from our investment grade corporate bond, convertible securities and emerging markets debt trading activities for the eleven months ended November 30, 2010 were negatively affected by tightening credit spreads and the difficult conditions in world credit markets during the period and downward pressure on yields, although this was partially offset by positive trading opportunities in Latin American debt in the latter part of 2010. This is compared to a period of historically wide credit spreads during the twelve months ended December 31, 2009 and market volatility in the credit and convertible markets resulting in a considerably strong performance from our corporate bond and convertible securities trading business in the 2009 period. Emerging markets revenues were also particularly strong in 2009 as both volumes and market share were higher and we benefited from trading opportunities from new issuances and sovereign debt restructurings.
 
Continued tightening in Treasury yields and a consensus dampening on inflation during the eleven months ended November 30, 2010 contributed to the decline in trading revenues from our U.S. government and agencies business as compared to a favorable trading environment in the 2009 period. Mortgage-backed securities revenue decreased during the 2010 period on tightening bid offer spreads and a challenging international environment with an intensified sovereign debt crisis as compared to high levels of customer trading volume and certain exceptional trading opportunities in the comparable prior period. The expansion of our government and agencies platform in Europe, assisted by our appointment in several European jurisdictions as dealers for government bond issues results in additional fixed income generation for fiscal 2010 with increased customer flow volumes. High yield sales and trading revenue increased for the eleven months ended November 30, 2010 as compared to the twelve months ended December 31, 2009 benefiting from strong market conditions for high yield issuances and market volatility, although international high yield revenues were affected by the credit concerns within the Eurozone and losses on certain credit hedges impacted the contributions from our bank loan trading activities.
 
2009 v. 2008 — Fixed income revenues were a record $1,177.2 million, up from revenues of $111.3 million in 2008. The significantly higher revenues for 2009 reflected the continued growth of our fixed income businesses with strong contributions from our corporate bond, mortgage-backed securities, government and agencies, emerging markets, high yield and convertible debt trading businesses and the addition of municipal bond trading


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
activities as a result of our acquisition of Depfa in March 2009, nominally offset by lower commodities revenues. Corporate bond revenues were up substantially over the prior comparable period benefiting from continued growth in market share and record volume for the year. This resulted in increased principal transactions trading revenues, predominantly arising from customer flow business, partially muted by tightening credit spreads in the latter part of 2009. Significant increases in mortgage-backed securities revenues were driven by higher levels of customer trading volume, contributions from the ramp up of our international mortgage trading efforts and certain exceptional trading opportunities, as well as net interest revenue contributions from the yield on mortgage-backed securities trading inventory throughout the greater part of 2009. Increases in revenues from our government and agencies business also were driven by greater volumes with the expansion of our platform, including in connection with our role as a U.S. Primary Dealer beginning in June 2009. Emerging markets revenues included strong profits from its principal transactions activities, as both volumes and market share grew, assisted by trading opportunities from new issuances and sovereign debt restructurings, partly impacted by tightening yields during the year and reduced trading flows in the fourth quarter due to specific country events. Growth in convertible securities commissions and principal trading revenues for 2009 as compared to 2008 is partly a result of expanding market share and the addition of sales and trading personnel and is reflective of improved results from 2008, which was characterized by net principal transaction losses given the difficult market conditions and high market volatility for the sector in 2008. The increase in high yield revenues was driven primarily by an increase in sales volumes generating high commission revenue, as well as significant net principal transaction gains, given certain exceptional trading opportunities and overall improved markets. High yield revenues also reflected the expansion of our bank loan trading business throughout 2009, which benefited from increased trading volume as well as favorable market opportunities, partially offset by losses on credit hedges. Considerably higher high yield revenues in 2009 is also reflective of the significant impact of principal transaction losses in 2008 as asset values declined in a severely unfavorable market.
 
Of the results recognized in Jefferies High Yield Holdings, LLC (our high yield and distressed securities and bank loan trading and investment business), approximately 66%, 66% and 63% of such results for the eleven months ended November 30, 2010 and the twelve months ended December 31, 2009 and 2008, respectively, are allocated to the minority investors and are presented within interest on mandatorily redeemable preferred interests and net earnings (loss) to noncontrolling interests in our Consolidated Statements of Earnings.
 
Investment Banking Revenue
 
We provide a full range of financial advisory services to our clients across nearly all industry sectors in both the U.S. and international markets. Capital markets revenue includes underwriting revenue related to debt and equity convertible financing services. Advisory revenue is generated from our advisory services with respect to merger, acquisition and restructuring transactions and fund placement activities. The following table sets forth our investment banking revenue (in thousands):
 
                                         
    Eleven Months
                         
    Ended
                         
    November 30,
    Twelve Months Ended December 31,     % Change  
    2010     2009     2008     2010/2009     2009/2008  
 
Equity
  $ 126,363     $ 89,807     $ 62,396       41 %     44 %
Debt
    347,471       193,187       55,266       80 %     250 %
                                         
Capital markets
    473,834       282,994       117,662       67 %     141 %
Advisory
    416,500       191,321       308,225       118 %     (38 )%
                                         
Total
  $ 890,334     $ 474,315     $ 425,887       88 %     11 %
                                         
 
2010 v. 2009 — Investment banking revenues were a record $890.3 million for the eleven months ended November 30, 2010 as compared to revenues of $474.3 million for the twelve months ended December 31, 2009, an 88% increase. Capital markets revenues totaled $473.8 million for the eleven months ended November 30, 2010, compared to $283.0 million for 2009, reflecting the strengthening in our market share and bookrunner roles in


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
capital markets underwritings, improved market environment for debt and equity underwritings, and the contribution of our mortgage securities origination platform. Revenues from our advisory business of $416.5 million for 2010 were double the prior year revenues of $191.3 million, reflective of the overall strengthened market for mergers and acquisitions activity and were generated from a broad range of clients and transactions. Investment banking revenues overall benefited in the 2010 period from the addition of professional talent and capabilities during 2010 and the continued build out of client coverage efforts.
 
2009 v. 2008 — Capital markets revenues totaled $283.0 million for the year ended December 31, 2009, compared to $117.7 million for 2008, reflecting an overall improvement in the capital markets in the second half of 2009 for both debt and equity underwritings, the contribution of our mortgage securities origination platform and the addition of our municipal securities underwriting capabilities during 2009. Revenues from our advisory business of $191.3 million for 2009 were down compared to the prior year revenues of $308.2 million, reflective of the overall decline in closed mergers and transaction volume for these comparative periods as experienced by the investment banking advisory sector as a whole and as compared to strong advisory revenue performance in the first part of 2008. The decline in mergers and acquisition revenues was partially offset by revenues generated by our restructuring advisory practice throughout 2009.
 
Asset Management Fees and Investment Income (Loss) from Managed Funds
 
Asset management revenues include revenues from management, administrative and performance fees from funds and accounts managed by us, revenues from asset management and performance fees from related party managed funds and investment income (loss) from our investments in these funds. The following summarizes revenue from asset management fees and investment income (loss) for the eleven months ended November 30, 2010, and the twelve months ended December 31, 2009 and 2008 (in thousands):
 
                         
    Eleven Months
             
    Ended
    Twelve Months Ended
 
    November 30,
    December 31,  
    2010     2009     2008  
 
Asset management fees:
                       
Fixed Income
  $ 3,590     $ 6,740     $ 8,548  
Equities
    3,708       2,912       1,430  
Convertibles
    5,429       17,808       9,619  
Commodities
    3,792       1,052       15  
                         
      16,519       28,512       19,612  
Investment income (loss) from managed funds(1)
    266       7,375       (72,541 )
                         
Total
  $ 16,785     $ 35,887     $ (52,929 )
                         
 
 
(1) Of the total investment income (loss) from managed funds, $0.2 million, $45,000 and $1.7 million is attributed to noncontrolling interest holders for the eleven months ended November 30, 2010 and the twelve months ended December 31, 2009 and 2008, respectively.
 
2010 v. 2009 — Asset management fees decreased to $16.5 million for the eleven months ended November 30, 2010 as compared to asset management fees of $28.5 million for 2009, primarily due reduced performance fee revenue generated by our global convertible bond fund business in 2010 as compared to 2009. Investment income from managed funds totaled $0.3 million for 2010 as compared to investment income of $7.4 million for 2009 primarily due to losses on our investment in one equity fund and reduced revenues generated from portfolio strategies in our convertible bond fund business, partially offset by improved valuations in our investment in Jefferies Capital Partners IV L.P.. Additionally, investment income for the twelve months ended December 31, 2009 included returns on our investment in managed collateralized loan obligations (“CLOs”), which are now included within Principal transaction revenues as our contracts to manage the CLOs were sold in January 2010.


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
2009 v. 2008 — Asset management fees increased to $28.5 million for the year ended December 31, 2009 as compared to asset management fees of $19.6 million for 2008, primarily as a result of strong performance fee revenue generated by our global convertible bond fund business, solid results from our managed equity funds in the financial services and technology sectors and from fee revenue generated on new commodity managed accounts opened during 2009. Investment income from managed funds totaled $7.4 million for 2009 as compared to an investment loss of $72.5 million for 2008 primarily due to investment revenues generated from portfolio strategies in our convertible bond fund business and improved asset valuations for our managed CLOs as compared to 2008, partially offset by investment losses in certain private equity funds in 2009. Investments results in 2008 were also negatively impacted by the liquidation of several of our managed funds during 2008.
 
Assets under Management
 
Period end assets under management by predominant asset strategy were as follows (in millions):
 
                 
    Eleven Months
    Twelve Months
 
    Ended
    Ended
 
    November 30,
    December 31,
 
    2010     2009  
 
Assets under management(1)(3):
               
Fixed Income
  $     $ 1,607  
Equities
    88       80  
Convertibles
    1,863       1,737  
Real Assets
    13        
                 
      1,964       3,424  
                 
Assets under management by related parties(2):
               
Private Equity(4)
    592       600  
                 
      592       600  
                 
Total
  $ 2,556     $ 4,024  
                 
 
 
(1) Assets under management include assets actively managed by us including hedge funds and managed accounts. Assets under management do not include the assets of funds that are consolidated due to the level or nature of our investment in such funds.
 
(2) Related party managed funds in which we have a 50% or less interest in the entities that manage these assets or otherwise receive a portion of the management fees.
 
(3) Assets under management are based on the fair value of the assets.
 
(4) Assets under management represent either the capital commitment to a fund or carrying value of a fund depending on how management fees are calculated as governed by the partnership or management agreement.
 
On January 29, 2010, contracts to manage CLOs, which were included as assets under management at December 31, 2009, were sold to Babson Capital Management, LLC. We no longer manage the CLOs, but are entitled to receive a portion of the asset management fees for the remaining life of the contracts.


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
Change in Assets under Management
 
                         
    Eleven Months
    Twelve Months
       
    Ended
    Ended
       
    November 30,
    December 31,
    %
 
    2010     2009     Change  
    (In millions)  
 
Balance, beginning of period
  $ 4,024     $ 3,491       15 %
                         
Net cash flow out
    (1,286 )     (468 )        
Net market (depreciation) appreciation
    (182 )     1,001          
                         
      (1,468 )     533          
                         
Balance, end of period
  $ 2,556     $ 4,024       (36 )%
                         
 
The net decrease in assets under management of $1.5 billion during the eleven months ended November 30, 2010 is primarily attributable to the sale of our contracts to manage certain CLOs and market depreciation in the underlying assets in a third party managed private equity fund, partially offset by capital commitments to the Jefferies Capital Partners V L.P. private equity fund, which was launched during the third quarter of 2010. The net increase in assets under management of $533 million during the twelve months ended December 31, 2009 is primarily attributable to market appreciation of the underlying assets in our global convertible bond funds and in managed CLOs, partially offset by redemptions from our global convertible bond funds.
 
We manage certain portfolios as mandated by client arrangements and management fees are assessed based upon an agreed upon notional account value. Managed accounts based on this measure by predominant asset strategy were as follows:
 
                 
    Eleven Months
    Twelve Months
 
    Ended
    Ended
 
    November 30,
    December 31,
 
(notional account value)   2010     2009  
    (In millions)  
 
Managed Accounts:
               
Equities
  $ 147     $ 51  
Commodities
    802       509  
                 
    $ 949     $ 560  
                 
 
Change in Managed Accounts
 
                 
    Eleven Months
    Twelve Months
 
    Ended
    Ended
 
    November 30,
    December 31,
 
(notional account value)   2010     2009  
    (In millions)  
 
Balance, beginning of period
  $ 560     $  
Net account additions
    372       534  
Net account appreciation
    17       26  
                 
Balance, end of period
  $ 949     $ 560  
                 
 
The change in the notional account value of managed accounts for the eleven months ended November 30, 2009 is primarily attributed to the additions of new equity and commodity accounts where the management fees are assessed on the agreed upon notional account value.


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
The following table presents our invested capital in managed funds at November 30, 2010 and December 31, 2009 (in thousands):
 
                 
    Eleven Months
    Twelve Months
 
    Ended
    Ended
 
    November 30,
    December 31,
 
    2010     2009  
 
Unconsolidated funds(1)
  $ 131,024     $ 115,009  
Consolidated funds(2)
    53,843       44,441  
                 
Total
  $ 184,867     $ 159,450  
                 
 
 
(1) Our invested capital in unconsolidated funds is reported within Investments in managed funds on the Consolidated Statement of Financial Condition.
 
(2) Assets under management include assets actively managed by us and third parties including hedge funds, CLOs, managed accounts and other private investment funds. Due to the level or nature of our investment in such funds, certain funds are consolidated and the assets and liabilities of these funds are reflected in our consolidated financial statements primarily within Financial instruments owned. We do not recognize asset management fees for funds that we have consolidated.
 
Compensation and Benefits
 
Compensation and benefits expense consists primarily of salaries, benefits, cash bonuses, commissions, annual share-based compensation awards, the amortization of certain nonannual share-based and cash compensation to employees. Annual share-based awards to employees as a part of year end compensation contain provisions such that employees who terminate their employment or are terminated without cause may continue to vest in their awards, so long as those awards are not forfeited as a result of other forfeiture provisions of those awards.
 
Accordingly, the compensation expense for share-based awards granted at year end as part of annual compensation is fully recorded in the year of the award
 
2010 v. 2009 — Compensation and benefits expense totaled $1,282.6 million for the eleven months ended November 30, 2010, a ratio of compensation and benefits to net revenues of 59%. This is in comparison to compensation and benefits expense of $1,196.0 million for the twelve months ended December 31, 2009, with a ratio of compensation and benefits expense to net revenues of 55%. Employee headcount increased to 3,084 employees globally as compared to 2,628 global employees at December 31, 2009. The increase in compensation and benefits expense in 2010 as compared to 2009 is consistent with the increased staffing levels both domestically and internationally in connection with our business growth. The increase in compensation and benefits expense and the related ratio of compensation expense to net revenues for the eleven months ended November 30, 2010 as compared to the twelve months ended December 31, 2009 is also reflective of significant investments in our support groups. Compensation and benefits expense in 2010 includes the cost of the fair value of restricted stock and RSUs granted to employees (other than our two most senior executive officers) as part of year end bonus compensation. Compensation costs for 2010 also include share-based amortization expense for senior executive awards granted in January 2010 and nonannual share-based awards to other employees.
 
On March 30, 2010, the U.S. President signed the Health Care and Education Reconciliation Act of 2010, which is a reconciliation bill that amends the Patient Protection and Affordable Care Act that was signed by the President on March 23, 2010 (collectively the “Acts”). Jefferies currently provides its employees and their eligible dependants with health insurance. Our insurance plan is self-insured (with stop loss coverage for large claims) administered by a third party. Former employees who meet age and service criteria are eligible for retiree coverage both before and after age 65. Jefferies does not subsidize any medical benefits for such former employees and therefore receives no Medicare Part D subsidy to help pay for prescription drug coverage. Because we never received the subsidy, the elimination of this subsidy will have no impact on us. Other health care mandated


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
provisions under the Acts, such as dependant coverage to age 26 and elimination of waiting periods and lifetime benefit limits are not expected to have material effect on the cost of the health plan.
 
2009 v. 2008 — Compensation and benefits expense totaled $1,196.0 million for the year ended December 31, 2009, a ratio of compensation and benefits to net revenues of 55%. This is in comparison to compensation and benefits expense of $1,522.2 million for the year ended December 31, 2008, with a ratio of compensation and benefits to net revenues of 150%. The decrease in compensation and benefits expense in 2009 as compared to 2008 is primarily the result of expensing in 2008 share-based compensation awarded to employees in previous years of approximately $302.6 million, expenses associated with share-based compensation awards granted to employees in December 2008 of approximately $74.0 million, expenses in 2008 associated with the modification of outstanding employee loans of approximately $33.0 million, and severance costs incurred during 2008 of $71.0 million. These factors that contributed to the net decline in compensation and benefits expense in 2009 as compared to 2008 are partially offset by increases in compensation and benefits expense during 2009 due to added revenue from our expanding fixed income and equity businesses and increased staffing levels both domestically and internationally in connection with our business growth. Compensation and benefits expense in 2009 includes the cost of 100% of the fair value of restricted stock and RSUs granted to employees (other than our two most senior executive officers) as part of year end bonus compensation. The impact of bank payroll tax legislation in the U.K. and other foreign governments was not accrued for in 2009 and we have determined, at this time, that we are not subject to the scope of the legislation based on our capital base.
 
Non-Compensation Expenses
 
2010 v. 2009 — Non-compensation expenses were $498.0 million for the eleven months ended November 30, 2010, an 18% increase as compared to expenses of $422.3 million for the twelve months ended December 31, 2009, which reflects an increase in floor brokerage and clearing fees due to added business platforms, an increase in technology and communications costs as the expansion of our personnel and business platforms has increased the demand for market data and technology connections, an increase in business development expense commensurate with our focused efforts of strengthening our presence and globalizing our client base and an increase in professional services as we build our infrastructure to support our business growth. Other non-interest expenses for the eleven months of 2010 also include our donation to Haiti earthquake related charities in January 2010, of which $6.8 million is reflected in Other expenses, an increase in assessments from SIPC consistent with SIPC rate increases for the overall industry and the writeoff of certain trade and loan receivables.
 
2009 v. 2008 — Non-compensation expenses were $422.3 million for the year ended December 31, 2009, a 6% decrease as compared to 2008, which is primarily attributed to lower business development expenses and other expenses as a result of the cost reduction initiatives enacted at the end of 2008. Additionally, the decline in other expenses in comparing 2009 to 2008 is primarily attributed to losses within other expenses in the second half of 2008 incurred in connection with unwinding certain securities lending transactions with Lehman Brothers and Landsbankinn as counterparties and other credit losses attributed to exposures from Lehman Brothers. The decrease in non-compensation expenses due to these factors is partially offset by an increase in floor brokerage and clearing fees due to the level of trading volume throughout most of 2009 and increased technology and communications costs as the expansion of our personnel and business platforms has increased the demand for market data and technology connections.
 
Earnings / (Loss) Before Income Taxes
 
Earnings before income taxes was $396.7 million for the eleven months ended November 30, 2010 down from $507.7 million for the twelve months ended December 31, 2009 and a loss before income taxes of $(888.2) million for the twelve months ended December 31, 2008.


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
Income Taxes
 
The provision for income taxes was a tax expense of $156.4 million, a tax expense of $195.9 million and a tax benefit of $293.4 million for the eleven months ended November 30, 2010 and the twelve months ended December 31, 2009, and 2008, respectively. The provision for income taxes resulted in effective tax rates of 39%, 39% and 33%, respectively. The increase in our effective tax rate for the year ended December 31, 2009 as compared to 2008 is attributable to a marginally higher increase in the balance of unrecognized tax benefits coupled with the 2008 effective tax rate having been driven down by a loss to noncontrolling interests in 2008.
 
Earnings /(Loss) per Common Share
 
Diluted net earnings per common share was $1.09 for the eleven months ended November 30, 2010 on 200,511,000 shares compared to earnings per common share of $1.35 for the twelve months ended December 31, 2009 on 204,572,000 shares and diluted (loss) earnings per common share of $(3.30) for the twelve months ended December 31, 2008 on 166,163,000 shares. Convertible preferred stock dividends were not included in the calculation of diluted (loss) earnings per common share for the year ended December 31, 2008 due to their antidilutive effect on (loss) earnings per common share. See Note 17, “Earnings Per Share,” in our consolidated financial statements for further information regarding the calculation of earnings (loss) per common share.
 
Critical Accounting Policies
 
The consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), which require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes. Actual results can and may differ from estimates. These differences could be material to the financial statements.
 
We believe our application of GAAP and the associated estimates are reasonable. Our accounting policies and estimates are constantly reevaluated, and adjustments are made when facts and circumstances dictate a change. Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates.
 
We believe our critical accounting policies (policies that are both material to the financial condition and results of operations and require our most subjective or complex judgments) are our valuation of financial instruments, assessment of goodwill and our use of estimates related to compensation and benefits during the year. For further discussion of these and other significant accounting policies, see Note 2, “Summary of Significant Accounting Policies,” in our consolidated financial statements.
 
Valuation of Financial Instruments
 
Financial instruments owned and Financial instruments sold, not yet purchased are recorded at fair value. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). Unrealized gains or losses are generally recognized in Principal transactions in our Consolidated Statements of Earnings.


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
The following is a summary of the fair value of major categories of financial instruments owned and financial instruments sold, not yet purchased, as of November 30, 2010 and December 31, 2009 (in thousands):
 
                                 
    November 30, 2010     December 31, 2009  
          Financial
          Financial
 
          Instruments
          Instruments
 
    Financial
    Sold,
    Financial
    Sold,
 
    Instruments
    Not Yet
    Instruments
    Not Yet
 
    Owned     Purchased     Owned     Purchased  
 
Corporate equity securities
  $ 1,565,793     $ 1,638,372     $ 1,500,042     $ 1,360,528  
Corporate debt securities
    3,630,616       2,375,925       2,412,134       1,909,781  
Government, federal agency and other sovereign obligations
    5,191,973       4,735,288       1,762,643       1,735,861  
Mortgage- and asset-backed securities
    4,921,565       129,384       3,089,435       21,474  
Loans and other receivables
    434,573       171,278       591,208       363,080  
Derivatives
    119,268       59,552       62,117       18,427  
Investments
    77,784             70,156        
                                 
    $ 15,941,572     $ 9,109,799     $ 9,487,735     $ 5,409,151  
                                 
 
Fair Value Hierarchy
 
In determining fair value, we maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs reflect our assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. We apply a hierarchy to categorize our fair value measurements broken down into three levels based on the transparency of inputs, where Level 1 uses observable prices in active markets and Level 3 uses valuation techniques that incorporate significant unobservable inputs and broker quotes that are considered less observable. Greater use of management judgment is required in determining fair value when inputs are less observable or unobservable in the marketplace, such as when the volume or level of trading activity for a financial instrument has decreased and when certain factors suggest that observed transactions may not be reflective of orderly market transactions. Judgment must be applied in determining the appropriateness of available prices, particularly in assessing whether available data reflects current prices and/or reflects the results of recent market transactions. Prices or quotes are weighed when estimating fair value with greater reliability placed on information from transactions that are considered to be representative of orderly market transactions.
 
Fair value is a market based measure; therefore, when market observable inputs are not available, our judgment is applied to reflect those judgments that a market participant would use in valuing the same asset or liability. The availability of observable inputs can vary for different products. We use prices and inputs that are current as of the measurement date even in periods of market disruption or illiquidity. The valuation of financial instruments classified in Level 3 of the fair value hierarchy involves the greatest amount of management judgment. For further information on the fair value definition, Level 1, Level 2, Level 3 and related valuation techniques, see Notes 2 and 5 to the consolidated financial statements.


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
Level 3 Assets and Liabilities — The following table reflects the composition of our Level 3 assets and Level 3 liabilities by asset class (in thousands):
 
                                 
          Financial Instruments Sold,
 
    Financial Instruments Owned     Not Yet Purchased  
    November 30,
    December 31,
    November 30,
    December 31,
 
    2010     2009     2010     2009  
 
Loans and other receivables
  $ 227,596     $ 506,542     $ 47,228     $ 352,420  
Residential mortgage-backed securities
    132,359       136,496              
Investments
    77,784       65,564              
Corporate debt securities
    73,408       116,648              
Collateralized debt obligations
    31,121       9,570              
Corporate equity securities
    22,619       43,042       38        
Commercial mortgage-backed securities
    6,004       3,215              
Other asset-backed securities
    567       110              
U.S. issued municipal securities
    472       420              
Derivatives
          1,909       2,346       4,926  
Sovereign obligations
          196              
                                 
Total Level 3 assets
    571,930       883,712       49,612       357,346  
Level 3 assets for which the firm bears no economic exposure(1)
    (204,139 )     (379,153 )            
                                 
Level 3 assets for which the firm bears economic exposure
  $ 367,791     $ 504,559     $ 49,612     $ 357,346  
                                 
Total Level 3 as a percentage of total financial instruments
    4 %     9 %     0.5 %     7 %
 
 
(1) Consists of Level 3 assets which are financed by nonrecourse secured financing or attributable to third party or employee noncontrolling interests in certain consolidated entities.
 
While our Financial instruments sold, not yet purchased, which are included within liabilities on our Consolidated Statement of Financial Condition, are accounted for at fair value, we do not account for any of our other liabilities at fair value, except for certain secured financings that arise in connection with our securitization activities included with Other liabilities of approximately $85.7 million at November 30, 2010.
 
The following table reflects activity with respect to our Level 3 assets and liabilities (in millions):
 
                         
    Eleven Months
             
    Ended
             
    November 30,
    Twelve Months Ended December 31,  
    2010     2009     2008  
 
Assets:
                       
Transfers from Level 3 to Level 2
  $ 163.9     $ 126.1     $ 143.5  
Transfers from Level 2 to Level 3
    25.3       143.8       222.4  
Net gains (losses)
    107.5       43.3       (123.3 )
Liabilities:
                       
Transfers from Level 3 to Level 2
  $ 93.3     $ 5.1     $ 1.6  
Transfers from Level 2 to Level 3
    0.04       3.0       22.5  
Net losses
    2.3       2.3       20.2  


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
See Note 5, Financial Instruments, in the consolidated financial statements for additional discussion on transfers of assets and liabilities among the fair value hierarchy levels.
 
Level 3 cash instruments are frequently hedged with instruments classified within Level 1 and Level 2, and accordingly, gains or losses that have been reported in Level 3 are frequently offset by gains or losses attributable to instruments classified within Level 1 or Level 2 or by gains or losses on derivative contracts classified in Level 3 of the fair value hierarchy.
 
Controls Over the Valuation Process for Financial Instruments — Our valuation team, independent of the trading function, plays an important role in determining that our financial instruments are appropriately valued and that fair value measurements are reliable. This is particularly important where prices or valuations that require inputs are less observable. In the event that observable inputs are not available, the control processes are designed to assure that the valuation approach utilized is appropriate and consistently applied and that the assumptions are reasonable. Where a pricing model is used to determine fair value, these control processes include reviews of the pricing model’s theoretical soundness and appropriateness by risk management personnel with relevant expertise who are independent from the trading desks. In addition, recently executed comparable transactions and other observable market data are considered for purposes of validating assumptions underlying the model.
 
Goodwill
 
At least annually we are required to assess goodwill for impairment by comparing the estimated fair value of the operating segment with its net book value. Periodically estimating the fair value of the Capital Markets segment requires significant judgment. We estimate the fair value of the operating segment based on valuation methodologies we believe market participants would use, including consideration of control premiums for recent acquisitions observed in the market place. As a result of our change in fiscal year end from December 31 to November 30, we determined that an annual goodwill impairment testing date of June 1 is preferable under the circumstances to September 30. Accordingly, during the year ended November 30, 2010, we changed the date of our annual goodwill impairment testing to June 1. The change in the annual goodwill impairment testing date was made to keep the test in the same time frame, as it was before our change in fiscal year end, and to move it to a time of year when our resources are less constrained. This change in our goodwill impairment testing date is deemed a change in accounting principle. We believe that the change in accounting principle does not delay, accelerate, or avoid a goodwill impairment charge and does not result in adjustments to our consolidated financial statements when applied retrospectively. We have completed our annual test of goodwill impairment as of June 1, 2010 and less than twelve months have elapsed between annual tests. No impairment was identified.
 
Compensation and Benefits
 
A portion of our compensation and benefits represents discretionary bonuses, which are finalized at year end. In addition to the level of net revenues, our overall compensation expense in any given year is influenced by prevailing labor markets, revenue mix, profitability, individual and business performance metrics, and our use of share-based compensation programs. We believe the most appropriate way to allocate estimated annual total compensation among interim periods is in proportion to projected net revenues earned. Consequently, during the year we accrue compensation and benefits based on annual targeted compensation ratios, taking into account the mix of our revenues and the timing of expense recognition. Our three month period ended November 30, 2010 reflects the actual total compensation and benefits we expect to pay for the eleven month period.


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
Accounting and Developments
 
The following is a summary of ASC Topics that have or will impact our disclosures and/or accounting policies for financial statements issued for interim and annual periods:
 
Consolidation
 
We have adopted accounting changes described in ASC 810, Consolidation Topic, as of January 1, 2010, which require that the party who has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and who has an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity consolidate the variable interest entity. The changes to ASC 810, effective as of January 1, 2010, eliminate the quantitative approach previously applied to assessing whether to consolidate a variable interest entity and require ongoing reassessments for consolidation. Upon adoption of these accounting changes on January 1, 2010, we consolidated certain CLOs and other investment vehicles. The consolidation of these entities resulted in an increase in total assets of $1,606.9 million, an increase in total liabilities of $1,603.8 million and an increase to total stockholders’ equity of $3.1 million on January 1, 2010. Subsequently, we sold and assigned our management agreements for the CLOs to a third party; thus we no longer have the power to direct the most significant activities of the CLOs. Upon the assignment of the management agreements in January 2010, we deconsolidated the CLOs and accounted for our remaining interests in the CLOs at fair value.
 
Transfers and Servicing
 
We adopted further accounting changes described in ASC 860, Transfers and Servicing Topic, as of January 1, 2010, which eliminate the concept of a qualifying special purpose entity, require that a transferor consider all arrangements made contemporaneously with, or in contemplation of, a transfer of assets when determining whether derecognition of a financial asset is appropriate, clarify the requirement that a transferred financial asset be legally isolated from the transferor and any of its consolidated affiliates, stipulate that constraints on a transferee’s ability to freely pledge or exchange transferred assets causes the transfer to fail sale accounting, and define participating interests and provides guidance on derecognizing participating interests. The adoption did not have an effect on our financial condition, results of operations or cash flows.
 
Liquidity, Financial Condition and Capital Resources
 
Our Chief Financial Officer and Treasurer are responsible for developing and implementing our liquidity, funding and capital management strategies. These policies are determined by the nature and needs of our day to day business operations, business opportunities, regulatory obligations, and liquidity requirements.
 
During 2010, market conditions have continued to improve and we have experienced access to additional liquidity providers and increased funding availability. Throughout the fiscal year, this has resulted in a reduction in financing haircuts on certain asset classes as well as an expansion of asset classes being financed. These conditions point to further growth within funding markets that are now available to Jefferies. We expect significant liquidity in the short term part of the market (one year and less) will continue to present funding opportunities in multiple asset classes. Additionally, the growth in our customer liquidity pools made available to Jefferies have corresponded with the growth of Jefferies business activity. In 2009, Jefferies & Company, our U.S. registered broker-dealer, was named as a Primary Dealer by the Federal Reserve Bank of New York and Jefferies International, Ltd., our U.K. regulated broker-dealer, has been designated in a similar capacity in five countries in Europe. This designation has allowed the firm access to additional funding in the U.S. and certain regions of Europe.
 
Our actual levels of capital, total assets, and financial leverage are a function of a number of factors, including, asset composition, business initiatives and opportunities, regulatory requirements and cost and availability of both long term and short term funding. We have historically maintained a balance sheet consisting of a large portion of our total assets in cash and liquid marketable securities, arising principally from traditional securities brokerage activity. The liquid nature of these assets provides us with flexibility in financing and managing our business.


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
Liquidity
 
We continue to maintain significant cash balances on hand. The following are financial instruments that are cash and cash equivalents or are deemed by management to be generally readily convertible into cash, marginable or accessible for liquidity purposes within a relatively short period of time (in thousands):
 
                 
    November 30,
    December 31,
 
    2010     2009  
 
Cash and cash equivalents:
               
Cash in banks
  $ 325,227     $ 196,189  
Money market investments
    1,863,771       1,656,978  
                 
Total cash and cash equivalents
  $ 2,188,998     $ 1,853,167  
                 
 
The majority of financial instruments (both long and short) in our trading accounts are actively traded and readily marketable. We have the ability to readily obtain repurchase financing for a large portion of our inventory at haircuts of 10% or less, which reflects the marketability of our inventory. We continually assess the liquidity of our inventory based on the level at which we could obtain financing in the market place for a given asset. Assets are considered to be liquid if financing can be obtained in the repurchase market or the securities lending market at the collateral haircut levels of 10% or less. Additionally, agency mortgage-backed securities, which are eligible to be delivered to and cleared by the Fixed Income Clearing Corporation, are considered to be liquid. The following summarizes our financial instruments by asset class that we consider to be of a liquid nature and the amount of such assets that have not been pledged as collateral at November 30, 2010 (in thousands):
 
                 
          Unencumbered Liquid
 
    Liquid Financial
    Financial
 
    Instruments     Instruments  
 
Corporate equity securities
  $ 1,453,744     $ 264,603  
Corporate debt securities
    2,813,465       223,455  
Government, federal agency and other sovereign obligation
    5,159,605       168,523  
Mortgage- and asset-backed securities
    3,607,895        
                 
    $ 13,034,709     $ 656,581  
                 
 
In addition to being able to be readily financed at modest haircut levels, we estimate that each of the individual securities within each asset class could be sold into the market and converted into cash within three business days under normal market conditions, assuming that the entire portfolio of a given asset class was not simultaneously liquidated.
 
Liquidity Management Policies
 
The key objectives of the liquidity management framework are to support the successful execution of our business strategies while ensuring sufficient liquidity through the business cycle and during periods of financial distress. Our liquidity management policies are designed to mitigate the potential risk that we may be unable to access adequate financing to service our financial obligations without material franchise or business impact.
 
The principal elements of our liquidity management framework are our Contingency Funding Plan and our Cash Capital Policy.
 
  •  Contingency Funding Plan.  Our Contingency Funding Plan is designed based on a model of a potential liquidity contraction over a one year time period. This incorporates potential cash outflows during a liquidity stress event, including, but not limited to, the following: (a) repayment of all unsecured debt maturing within one year and no incremental unsecured debt issuance; (b) maturity rolloff of outstanding letters of credit with no further issuance and replacement with cash collateral; (c) higher margin requirements than currently exist on assets on securities financing activity, including repurchase agreements, (d) lower availability of secured


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
  funding; (e) client cash withdrawals; (f) the anticipated funding of outstanding investment commitments and (g) certain accrued expenses and other liabilities and fixed costs.
 
  •  Cash Capital Policy.  We maintain a cash capital model that measures long-term funding sources against requirements. Sources of cash capital include our equity, preferred stock and the noncurrent portion of long-term borrowings. Uses of cash capital include the following: (a) illiquid assets such as equipment, goodwill, net intangible assets, exchange memberships, deferred tax assets and certain investments; (b) a portion of securities inventory that is not expected to be financed on a secured basis in a credit stressed environment (i.e., margin requirements) and (c) drawdowns of unfunded commitments. To ensure that we do not need to liquidate inventory in the event of a funding crisis, we seek to maintain surplus cash capital, which is reflected in the leverage ratios we maintain. Our total capital of $7,030.5 million as of November 30, 2010 exceeded our cash capital requirements.
 
Financial Condition and Capital Management.
 
A business unit level balance sheet and cash capital analysis is prepared and reviewed with senior management on a weekly basis. As a part of this balance sheet review process, capital is allocated to all assets and gross and adjusted balance sheet limits are established. This process ensures that the allocation of capital and costs of capital are incorporated into business decisions. The goals of this process are to protect the firm’s platform, enable our businesses to remain competitive, maintain the ability to manage capital proactively and hold businesses accountable for both balance sheet and capital usage.
 
Analysis of Financial Condition and Capital Resources
 
We actively monitor and evaluate our financial condition and the composition of our assets and liabilities. Substantially all of our Financial instruments owned and Financial instruments sold, not yet purchased are valued on a daily basis and we monitor and employ balance sheet limits for our various businesses. As our government and agencies fixed income business has expanded throughout 2009 and 2010 both domestically and internationally, a greater portion of our securities inventory is comprised of U.S. government and agency securities and other G-7 government securities, for which there is a deep and liquid market. While our balance sheet may fluctuate given our continued expansion into new business areas and the need to maintain inventory to serve growing client activity, our overall balance sheet during the reported periods remained materially consistent with the balances at the end of each reporting period. In 2009, average total assets for each quarter varied from that quarter’s ending total assets in a range from -7% to +13%. During the eleven months ended November 30, 2010, average total assets were respectively approximately 3% higher than at November 30, 2010.


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
The following table provides detail on key balance sheet asset and liability line items (in millions):
 
                         
    November 30,
    December 31,
       
    2010     2009     % Change  
 
Total assets
  $ 36,726.5     $ 28,121.0       31 %
Financial instruments owned
    15,941.6       9,487.7       68 %
Financial instruments sold, not yet purchased
    9,109.8       5,409.2       68 %
Total Level 3 assets
    571.9       883.7       (35 )%
Level 3 assets for which we have economic exposure
    367.8       504.6       (27 )%
Securities borrowed
    8,152.7       8,238.0       (1 )%
Securities purchased under agreements to resell
    3,252.3       3,515.2       (7 )%
                         
Total securities borrowed and securities purchased under agreements to resell
  $ 11,405.0     $ 11,753.2       (3 )%
                         
Securities loaned
  $ 3,109.0     $ 3,592.8       (13 )%
Securities sold under agreements to repurchase
    10,684.1       8,239.1       30 %
                         
Total securities loaned and securities sold under agreements to repurchase
  $ 13,793.1     $ 11,831.9       (17 )%
                         
 
The increase in total assets at November 30, 2010 from December 31, 2009 is primarily due to an increase in the level of our financial instruments owned inventory. The increase in our inventory level of our financial instruments owned, including securities pledged to creditors, is coupled with a commensurate increase in the level of our financial instruments sold, not yet purchased over this time period.
 
A significant portion of the increase in our total financial instruments owned inventory is increased holdings of government and agency securities. Our inventory of government, federal agency and other sovereign obligations increased from $1.8 billion at December 31, 2009 to $5.2 billion at November 30, 2010. This net increase in our inventory positions (long and short inventory) is primarily attributed to the further build out of our U.S. government and agencies and other sovereign debt trading businesses, both domestically and internationally, as we were designated a Primary Dealer in the U.S. during 2009 and in similar capacities in several European jurisdictions as well during the latter part of 2009. These inventory positions are substantially comprised of the most liquid securities in the asset class with a significant portion in holdings of securities of G-7 countries. Our market risk exposure to Portugal, Italy, Ireland, Greece and Spain was negligible at November 30, 2010. Our net inventory positions also increased as of November 30, 2010 from December 31, 2009 due to increased opportunities in the high yield corporate debt market and the growth of our mortgage-backed securities platform. Our mortgage- and asset-backed securities inventory increased by 59%, from $3,089.4 million at December 31, 2009 to $4,921.6 million at November 30, 2010. We continually monitor our overall mortgage- and asset-backed securities exposure, including the inventory turnover rate, which confirms the liquidity of the overall asset class.
 
Of our total Financial instruments owned, approximately 81% are readily and consistently financeable at haircuts of 10% or less. In addition, as a matter of our policy, a portion of these assets have capital assessed, which is in addition to the funding haircuts provided in the securities finance markets. In addition, our Financial instruments owned consists of high yield bonds, bank loans, investments and non-agency mortgage-backed securities that are predominantly funded by long term capital. Under our cash capital policy, we model capital allocation levels that are more stringent than the haircuts used in the market for secured funding; and we maintain surplus capital at these modeled levels.
 
At November 30, 2010, our Level 3 assets for which we have economic exposure was 2% of our total assets at fair value as compared to 5% at December 31, 2009 and is reflective of the sale during the period of certain distressed equity, corporate debt and mortgage-backed securities that were classified within Level 3. Level 3 mortgage- and asset-backed securities represent 3% of total mortgage- and asset-backed securities inventory at both


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
November 30, 2010 and 5% at December 31, 2009 and represent 24% and 16% of total Level 3 assets at November 30, 2010 and December 31, 2009, respectively.
 
Securities financing assets and liabilities include both financing for our financial instruments trading activity and matched book transactions. Matched book transactions accommodate customers, as well as obtain securities for the settlement and financing of inventory positions. The outstanding balance of our securities borrowed and securities purchased under agreements to resell decreased by 3% from December 31, 2009 to November 30, 2010 due to a reduction in matched booked activity for our Equities securities financing business given reduced market opportunities for returns on this activity in the low interest rate environment. This was offset by growth in our government and agencies and mortgage-backed securities business, which utilize securities financing activity to support inventory balances. These assets are turned over on a frequent basis. The average increase in our securities financing assets and liabilities was 11% and 7%, respectively, higher than month end balances for the eleven months ended November 30, 2010. In 2009, our average securities financing assets and liabilities for each quarter varied from quarter end in a range of -12% to +17%.
 
The following table presents our period end balance, average quarterly balance and maximum balance at any month end within a quarter for the quarterly periods in 2010, 2009 and 2008 for Securities purchased under agreements to resell and Securities sold under agreements to repurchase (in millions):
 
                         
    Eleven Months
             
    Ended
             
    November 30,
    Twelve Months Ended December 31,  
    2010     2009     2008  
 
Securities Purchased Under Agreements to Resell
                       
Period end
    3,252       3,515       1,247  
Quarterly average
    3,769       3,521       3,152  
Maximum month end
    4,983       4,984       5,527  
Securities Sold Under Agreements to Repurchase
                       
Period end
    10,684       8,239       6,727  
Quarterly average
    11,464       8,936       7,049  
Maximum month end
    14,447       12,688       9,098  
 
Fluctuations in the balance of our repurchase agreements from period to period and intraperiod are dependent on business activity in those periods. During 2008 and early 2009, the level of our repurchase activity trended downward as we sought to maintain lower balance sheet levels during these periods given the broader industry liquidity disruptions that were occurring. The subsequent general growth in outstanding repo activity from early 2009 through 2010 is reflective of supporting our overall business growth, particularly the continued expansion of our mortgage-backed securities sales and trading platform, our appointment as a U.S. Federal Reserve Primary Dealer in June 2009 and our appointment in similar capacities in various European jurisdictions. Additionally, the fluctuations in the balances of our securities purchased under agreements to resell over the periods presented is impacted in any given period by our clients’ balances and our clients’ desires to execute collateralized financing arrangements via the repurchase market or via other financing products.
 
Average balances and period end balances will fluctuate based on market and liquidity conditions and we consider the fluctuations intraperiod to be typical for the repurchase market. As reflected above, month end balances may be higher or lower than average period balances.


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
Leverage Ratios
 
The following table presents total assets, adjusted assets, total stockholders’ equity and tangible stockholders’ equity with the resulting leverage ratios as of November 30, 2010 and December 31, 2009 (in thousands):
 
                 
    November 30,
    December 31,
 
    2010     2009  
 
Total assets
  $ 36,726,543     $ 28,121,023  
Deduct: Securities borrowed
    (8,152,678 )     (8,237,998 )
         Securities purchased under agreements to resell
    (3,252,322 )     (3,515,247 )
Add:    Financial instruments sold, not yet purchased
    9,109,799       5,409,151  
         Less derivative liabilities
    (59,552 )     (18,427 )
                 
Subtotal
    9,050,247       5,390,724  
Deduct: Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations
    (1,636,755 )     (1,089,803 )
         Goodwill and intangible assets
    (368,078 )     (368,670 )
                 
Adjusted assets
  $ 32,366,957     $ 20,300,029  
                 
Total stockholders’ equity
  $ 2,810,965     $ 2,619,678  
Deduct: Goodwill and intangible assets
    (368,078 )     (368,670 )
                 
Tangible stockholders’ equity
  $ 2,442,887     $ 2,251,008  
                 
Leverage ratio(1)
    13.1       10.7  
                 
Adjusted leverage ratio(2)
    13.2       9.0  
                 
 
 
(1) Leverage ratio equals total assets divided by total stockholders’ equity.
 
(2) Adjusted leverage ratio equals adjusted assets divided by tangible stockholders’ equity.
 
Adjusted assets is a non-GAAP financial measure and excludes certain assets that are considered of lower risk as they are generally self financed by customer liabilities through our securities lending activities. We view the resulting measure of adjusted leverage, also a non-GAAP financial measure, as a more relevant measure of financial risk when comparing financial services companies. Our leverage ratio and adjusted leverage ratio increased from November 30, 2010 to December 31, 2009 commensurate with the increase in our trading inventory and consistent with growth and expansion of our trading business year over year. A significant portion of the increase in our trading inventory is due to the expansion of our government and agencies business which trades in highly liquid U.S. government and agency securities and other G-7 government securities.


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
Capital Resources
 
We had total long-term capital of $7.0 billion and $5.8 billion resulting in a long-term debt to equity capital ratio of 1.50:1 and 1.21:1, at November 30, 2010 and December 31, 2009, respectively. Our total capital base as of November 30, 2010 and December 31, 2009 was as follows (in thousands):
 
                 
    November 30,
    December 31,
 
    2010     2009  
 
Long-Term Debt
  $ 3,778,681     $ 2,729,117  
Mandatorily Redeemable Convertible Preferred Stock
    125,000       125,000  
Mandatorily Redeemable Preferred Interest of Consolidated Subsidiaries
    315,885       318,047  
Total Stockholders’ Equity
    2,810,965       2,619,678  
                 
Total Capital
  $ 7,030,531     $ 5,791,842  
                 
 
Our assets are funded by equity capital, senior debt, convertible debt, mandatorily redeemable convertible preferred stock, mandatorily redeemable preferred interests, securities loaned, securities sold under agreements to repurchase, customer free credit balances, bank loans and other payables. Our ability to support increases in total assets is largely a function of our ability to obtain short term secured and unsecured funding, primarily through securities financing transactions. This is also augmented by our $1,061.5 million of uncommitted secured and unsecured bank lines, including $1,025.0 million of bank loans and $36.5 million of letters of credit. Of the $1,061.5 million of uncommitted lines of credit, $261.5 million is unsecured and $800 million is secured. Secured amounts are collateralized by a combination of customer and firm securities. Letters of credit are used in the normal course of business mostly to satisfy various collateral requirements in favor of exchanges in lieu of depositing cash or securities. Bank loans represent temporary (usually overnight) secured and unsecured short term borrowings, which are generally payable on demand and generally bear interest at a spread over the federal funds rate. Bank loans that are unsecured are typically overnight loans used to finance financial instruments owned or clearing related balances. We had no outstanding secured or unsecured bank loans as of November 30, 2010 and December 31, 2009. Average daily bank loans for the eleven months ended November 30, 2010 and the twelve months ended December 31, 2009 were $23.8 million and $41.1 million, respectively.
 
Our ability to support increases in total assets was further enhanced by the cash proceeds from our $700 million senior unsecured debt issuances in 2009; and our issuance of $345 million convertible senior debentures in October 2009, which further demonstrates our access to long-term funding in the capital markets. Additionally, we issued $400 million and $150 million in unsecured senior notes in June and July 2010 with maturities of approximately 11 years and $500.0 million in unsecured senior notes in November 2010 with a maturity of 5 years. As of November 30, 2010, our long-term debt has an average maturity of 9.9 years, we have no scheduled debt maturities until 2012.
 
Our long-term debt ratings are as follows:
 
         
    Rating   Outlook
 
Moody’s Investors Service
  Baa2   Stable
Standard and Poor’s
  BBB   Stable
Fitch Ratings
  BBB   Stable
 
We rely upon our cash holdings and external sources to finance a significant portion of our day to day operations. Access to these external sources, as well as the cost of that financing, is dependent upon various factors, including our debt ratings. Our current debt ratings are dependent upon many factors, including industry dynamics, operating and economic environment, operating results, operating margins, earnings trend and volatility, balance sheet composition, liquidity and liquidity management, our capital structure, our overall risk management, business diversification and our market share and competitive position in the markets in which we operate. Deteriorations in


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
any of these factors could impact our credit ratings thereby increasing the cost of obtaining funding and impacting certain trading revenues, particularly where collateral agreements are referenced to our external credit ratings.
 
Contractual Obligations and Commitments
 
The tables below provide information about our commitments related to debt obligations, investments and derivative contracts as of November 30, 2010. The table presents principal cash flows with expected maturity dates (in millions):
 
                                                 
    Expected Maturity Date        
                2013
    2015
    2017
       
                and
    and
    and
       
    2011     2012     2014     2016     Later     Total  
 
Debt obligations:
                                               
Senior notes (contractual principal payments net of unamortized discounts and premiums)
  $     $ 306.0     $ 249.0     $ 847.9     $ 2,375.8     $ 3,778.7  
Interest payment obligations on senior notes
    241.4       224.7       428.6       372.1       1,143.4       2,410.2  
Mandatorily redeemable convertible preferred stock
                            125.0       125.0  
Interest payment obligations on Mandatorily redeemable convertible preferred stock
    4.1       4.1       8.1       8.1       77.7       102.1  
                                                 
      245.5       534.8       685.7       1,228.1       3,721.9       6,416.0  
                                                 
Commitments and guarantees:
                                               
Equity commitments
    0.5       0.1       9.8       3.4       217.8       231.6  
Loan commitments
    150.0       12.8       75.5       28.8             267.1  
Mortgage-related commitments
    575.1       262.7       67.2                   905.0  
Forward starting repos
    321.8                               321.8  
Derivative contracts:
                                               
Derivative contracts — non credit related
    16,528.3       3,379.0       6.2       15.0             19,928.5  
Derivative contracts — credit related
                37.6       163.4       29.7       230.7  
                                                 
      17,575.7       3,654.6       196.3       210.6       247.5       21,884.7  
                                                 
    $ 17,821.2     $ 4,189.4     $ 882.0     $ 1,438.7     $ 3,969.4     $ 28,300.7  
                                                 


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
As lessee, we lease certain premises and equipment under noncancelable agreements expiring at various dates through 2022 which are operating leases. Future minimum lease payments for all noncancelable operating leases at November 30, 2010 are as follows for the calendar periods through 2022 (in thousands):
 
                         
    Gross     Subleases     Net  
 
2011
  $ 51,165     $ 6,245     $ 44,920  
2012
    47,944       5,653       42,291  
2013
    45,937       5,436       40,501  
2014
    37,495       4,988       32,507  
2015
    21,721       2,372       19,349  
Thereafter
    103,337       2,521       100,816  
                         
    $ 307,599     $ 27,215     $ 280,384  
                         
 
Certain of our derivative contracts meet the definition of a guarantee and are therefore included in the above table. For additional information on commitments, see Note 19, “Commitments, Contingencies and Guarantees,” to the consolidated financial statements.
 
In the normal course of business we engage in other off balance sheet arrangements, including derivative contracts. Neither derivatives’ notional amounts nor underlying instrument values are reflected as assets or liabilities in our consolidated Statements of Financial Condition. Rather, the fair value of derivative contracts are reported in the consolidated Statements of Financial Condition as Financial instruments owned — derivative contracts or Financial instruments sold, not yet purchased — derivative contracts as applicable. Derivative contracts are reflected net of cash paid or received pursuant to credit support agreements and are reported on a net by counterparty basis when a legal right of offset exists under an enforceable master netting agreement. For additional information about our accounting policies and our derivative activities see Note 2, “Summary of Significant Accounting Policies,” Note 5, “Financial Instruments,” and Note 6, “Derivative Financial Instruments,” to the consolidated financial statements.
 
We are routinely involved with variable interest entities (“VIEs”) in connection with our mortgage-backed securities securitization activities. At November 30, 2010, we did not have any commitments to purchase assets from our securitization vehicles. At November 30, 2010, we held $725.1 million of mortgage-backed securities issued by VIEs for which we were initially involved as transferor and placement agent, which are accounted for at fair value and recorded within Financial instruments owned on our consolidated Statement of Financial Condition in the same manner as our other financial instruments. For additional information regarding our involvement with VIEs, see Note 8, “Securitization Activities and Variable Interest Entities,” to the consolidated financial statements.
 
Due to the uncertainty regarding the timing and amounts that will ultimately be paid, our liability for unrecognized tax benefits has been excluded from the above contractual obligations table. See Note 18, “Income Taxes,” to the consolidated financial statements for further information.
 
Equity Capital
 
Common stockholders’ equity increased to $2,478.0 million at November 30, 2010 from $2,298.1 million at December 31, 2009. The increase in our common stockholders’ equity during the eleven months ended November 30, 2010 is principally attributed to net earnings to common shareholders of $223.7 million and share-based compensation awards. This increase in our common stockholders’ equity is partially offset by dividend and dividend equivalents paid during the eleven months ended November 30, 2010 and repurchases of approximately 5.7 million shares of our common stock during the period, which increased our treasury stock by $140.1 million.


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
The following table sets forth book value, adjusted book value, tangible book value and adjusted tangible book value per share (in thousands, except per share data):
 
                 
    November 30, 2010     December 31, 2009  
 
Common stockholders’ equity
  $ 2,477,989     $ 2,298,140  
Less: Goodwill and intangible assets
    (368,078 )     (368,670 )
                 
Tangible common stockholders’ equity
  $ 2,109,911     $ 1,929,470  
Common stockholders’ equity
  $ 2,477,989     $ 2,298,140  
Add: Unrecognized compensation(6)
    160,960       53,512  
                 
Adjusted common stockholders’ equity
  $ 2,638,949     $ 2,351,652  
Tangible common stockholders’ equity
  $ 2,109,911     $ 1,929,470  
Add: Unrecognized compensation(6)
    160,960       53,512  
                 
Adjusted tangible common stockholders’ equity
  $ 2,270,871     $ 1,982,982  
Shares outstanding
    171,694,146       165,637,554  
Outstanding restricted stock units(5)
    28,734,563       27,404,347  
                 
Adjusted shares outstanding
    200,428,709       193,041,901  
Common book value per share(1)
  $ 14.43     $ 13.87  
                 
Adjusted common book value per share(2)
  $ 13.17     $ 12.18  
                 
Tangible common book value per share(3)
  $ 12.29     $ 11.65  
                 
Adjusted tangible common book value per share(4)
  $ 11.33     $ 10.27  
                 
 
 
(1) Common book value per share equals common stockholders’ equity divided by common shares outstanding.
 
(2) Adjusted common book value per share equals adjusted common stockholders’ equity divided by adjusted shares outstanding.
 
(3) Tangible common book value per share equals tangible common stockholders’ equity divided by common shares outstanding.
 
(4) Adjusted tangible common book value per share equals adjusted tangible common stockholders’ equity divided by adjusted shares outstanding.
 
(5) Outstanding restricted stock units, which give the recipient the right to receive common shares at the end of a specified deferral period, are granted in connection with our share-based employee incentive plans and include both awards that contain future service requirements and awards for which the future service requirements have been met.
 
(6) Unrecognized compensation relates to granted restricted stock and restricted stock units which contain future service requirements.
 
Tangible common stockholders’ equity, adjusted common stockholders’ equity, adjusted tangible common stockholders’ equity, adjusted common book value per share, tangible common book value per share, and adjusted tangible common book value per share are “non-GAAP financial measures.” A “non-GAAP financial measure” is a numerical measure of financial performance that includes adjustments to the most directly comparable measure calculated and presented in accordance with GAAP, or for which there is no specific GAAP guidance. Goodwill and other intangible assets are subtracted from common stockholders’ equity in determining tangible common stockholders’ equity as we believe that goodwill and other intangible assets do not constitute operating assets, which can be deployed in a liquid manner. The cost of restricted stock and restricted stock units that have been granted but for which the costs will be recognized in the future with the related service requirements is added to common stockholders’ equity and tangible common stockholders’ equity in determining adjusted common


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
stockholders’ equity and adjusted tangible common stockholders’ equity, respectively, as we believe that this is reflective of current capital outstanding and of the capital that would be required to be paid out at the balance sheet date. We calculate adjusted common book value per share as adjusted common stockholders’ equity divided by adjusted shares outstanding. We believe the adjustment to shares outstanding for outstanding restricted stock units reflects potential economic claims on our net assets enabling shareholders to better assess their standing with respect to our financial condition. Valuations of financial companies are often measured as a multiple of tangible common stockholders’ equity, inclusive of any dilutive effects, making these ratios, and changes in these ratios, a meaningful measurement for investors. In determining adjusted common stockholders’ equity, adjusted tangible common stockholders’ equity, adjusted common book value per share and adjusted tangible common book value per share, prior to November 30, 2010, we did not adjust Common stockholders’ equity for the restricted stock units for which the costs will be recognized in the future. Amount presented for prior periods have been conformed to reflect this calculation adjustment.
 
On December 30, 2009, we granted 5,384,000 shares of restricted stock as part of year end compensation. The closing price of our common stock was $23.77 on December 30, 2009. These shares were issued in the first three months of 2010 and increased shares outstanding as of November 30, 2010. On January 19, 2010, we granted 232,288 shares of restricted stock and 2,990,708 restricted stock units to senior executives as part of 2009 year end and future compensation arrangements for which no compensation expense was recognized in the results of operations for the year ended December 31, 2009. The shares of restricted stock were issued during the first three months of 2010 and increased shares outstanding at November 30, 2010. Shares underlying the restricted stock units will be issued in 2013, but are included in outstanding restricted stock units as of November 30, 2010 and increased adjusted shares outstanding. In addition, we issued approximately 4.2 million shares of restricted stock during the eleven months ended November 30, 2010, primarily in connection with awards to new employees. The increase in shares outstanding is offset by repurchases of 5.7 million shares at an average price of $24.66 during the eleven months ended November 30, 2010.
 
On November 29, 2010, we granted 5,062,000 shares of restricted stock and 127,000 restricted stock units as part of year end compensation. The closing price of our common stock was $24.28 on November 29, 2010. The shares of restricted stock will be issued in the first quarter of 2011 and will increase shares outstanding. Shares underlying the restricted stock units will be issued in future periods, but are included in outstanding restricted stock units as of November 30, 2010 and increased adjusted shares outstanding.
 
At November 30, 2010, we have $125.0 million of Series A convertible preferred stock outstanding, which is convertible into 4,105,138 shares of our common stock at an effective conversion price of approximately $30.45 per share and $345.0 million of convertible senior debentures outstanding, which is convertible into 8,800,122 shares of our common stock at an effective conversion price of approximately $39.20 per share.
 
On January 19, 2010, we declared a quarterly dividend of $0.075 in cash per share of common stock payable on March 15, 2010; on June 22, 2010, we declared a quarterly dividend of $0.075 in cash per share of common stock payable on August 16, 2010; on September 21, 2010, we declared a quarterly dividend of $0.075 in cash per share of common stock payable on November 15, 2010; and on December 17, 2010, we declared a quarterly dividend of $0.075 in cash per share of common stock payable on February 15, 2011. We did not declare dividends on our common stock to be paid during 2009.
 
Net Capital
 
Jefferies, Jefferies Execution and Jefferies High Yield Trading are subject to the net capital requirements of the SEC and other regulators, which are designed to measure the general financial soundness and liquidity of broker-dealers. Jefferies, Jefferies Execution and Jefferies High Yield Trading use the alternative method of calculation.


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
As of November 30, 2010, Jefferies, Jefferies Execution and Jefferies High Yield Trading’s net capital and excess net capital were as follows (in thousands):
 
                 
          Excess Net
 
    Net Capital     Capital  
 
Jefferies
  $ 585,123     $ 513,455  
Jefferies Execution
  $ 12,549     $ 12,299  
Jefferies High Yield Trading
  $ 517,577     $ 517,327  
 
Certain non-U.S. subsidiaries are subject to capital adequacy requirements as prescribed by the regulatory authorities in their respective jurisdictions, including Jefferies International Limited which is subject to the regulatory supervision and requirements of the Financial Services Authority in the United Kingdom. The subsidiaries consistently operate in excess of the net capital requirements.
 
Risk Management
 
Risk is an inherent part of our business and activities. The extent to which we properly and effectively identify, assess, monitor and manage each of the various types of risk involved in our activities is critical to our financial soundness and profitability. We seek to identify, assess, monitor and manage the following principal risks involved in our business activities: market, credit, operational, legal and compliance, new business, reputational and other. Risk management is a multifaceted process that requires communication, judgment and knowledge of financial products and markets. Senior management takes an active role in the risk management process and requires specific administrative and business functions to assist in the identification, assessment and control of various risks. Our risk management policies, procedures and methodologies are fluid in nature and are subject to ongoing review and modification.
 
Market Risk.  The potential for changes in the value of financial instruments is referred to as market risk. Our market risk generally represents the risk of loss that may result from a change in the value of a financial instrument as a result of fluctuations in interest rates, credit spreads, equity prices, commodity prices and foreign exchange rates, along with the level of volatility. Interest rate risks result primarily from exposure to changes in the yield curve, the volatility of interest rates, and credit spreads. Equity price risks result from exposure to changes in prices and volatilities of individual equities, equity baskets and equity indices. Commodity price risks result from exposure to the changes in prices and volatilities of individual commodities, commodity baskets and commodity indices. Market risk arises from marketmaking, proprietary trading, underwriting, specialist and investing activities. We seek to manage our exposure to market risk by diversifying exposures, controlling position sizes, and establishing economic hedges in related securities or derivatives. Due to imperfections in correlations, gains and losses can occur even for positions that are hedged. Position limits in trading and inventory accounts are established and monitored on an ongoing basis. Each day, consolidated position and exposure reports are prepared and distributed to various levels of management, which enable management to monitor inventory levels and results of the trading groups.
 
Credit Risk.  Credit risk represents the loss that we would incur if a client, counterparty or issuer of financial instruments, such as securities and derivatives, held by us fails to perform its contractual obligations. We follow industry practices to reduce credit risk related to various trading, investing and financing activities by obtaining and maintaining collateral. We adjust margin requirements if we believe the risk exposure is not appropriate based on market conditions. Liabilities to other brokers and dealers related to unsettled transactions (i.e., securities failed-to-receive) are recorded at the amount for which the securities were purchased, and are paid upon receipt of the securities from other brokers or dealers. In the case of aged securities failed-to-receive, we may purchase the underlying security in the market and seek reimbursement for losses from the counterparty in accordance with standard industry practices.
 
Operational Risk.  Operational risk generally refers to the risk of loss resulting from our operations, including, but not limited to, improper or unauthorized execution and processing of transactions, deficiencies in our operating systems, business disruptions and inadequacies or breaches in our internal control processes. Our


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JEFFERIES GROUP, INC AND SUBSIDIARIES — (Continued)
 
businesses are highly dependent on our ability to process, on a daily basis, a large number of transactions across numerous and diverse markets in many currencies. In addition, the transactions we process have become increasingly complex. If any of our financial, accounting or other data processing systems do not operate properly or are disabled or if there are other shortcomings or failures in our internal processes, people or systems, we could suffer an impairment to our liquidity, financial loss, a disruption of our businesses, liability to clients, regulatory intervention or reputational damage. These systems may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, including a disruption of electrical or communications services or our inability to occupy one or more of our buildings. The inability of our systems to accommodate an increasing volume of transactions could also constrain our ability to expand our businesses.
 
We also face the risk of operational failure or termination of any of the clearing agents, exchanges, clearing houses or other financial intermediaries we use to facilitate our securities transactions. Any such failure or termination could adversely affect our ability to effect transactions and manage our exposure to risk.
 
In addition, despite the contingency plans we have in place, our ability to conduct business may be adversely impacted by a disruption in the infrastructure that supports our businesses and the communities in which they are located. This may include a disruption involving electrical, communications, transportation or other services used by us or third parties with which we conduct business.
 
Our operations rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code, and other events that could have a security impact. If one or more of such events occur, this potentially could jeopardize our or our clients’ or counterparties’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our, our clients’, our counterparties’ or third parties’ operations. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us.
 
Legal and Compliance Risk.  Legal and compliance risk includes the risk of noncompliance with applicable legal and regulatory requirements. We are subject to extensive regulation in the different jurisdictions in which we conduct our business. We have various procedures addressing issues such as regulatory capital requirements, sales and trading practices, use of and safekeeping of customer funds, credit granting, collection activities, antimoney laundering and record keeping. We also maintain an anonymous hotline for employees or others to report suspected inappropriate actions by us or by our employees or agents.
 
New Business Risk.  New business risk refers to the risks of entering into a new line of business or offering a new product. By entering a new line of business or offering a new product, we may face risks that we are unaccustomed to dealing with and may increase the magnitude of the risks we currently face. We review proposals for new businesses and new products to determine if we are prepared to handle the additional or increased risks associated with entering into such activities.
 
Reputational Risk.  We recognize that maintaining our reputation among clients, investors, regulators and the general public is an important aspect of minimizing legal and operational risks. Maintaining our reputation depends on a large number of factors, including the selection of our clients and the conduct of our business activities. We seek to maintain our reputation by screening potential clients and by conducting our business activities in accordance with high ethical standards.
 
Other Risk.  Other risks encountered by us include political, regulatory and tax risks. These risks reflect the potential impact that changes in local and international laws and tax statutes have on the economics and viability of current or future transactions. In an effort to mitigate these risks, we continuously review new and pending regulations and legislation and participate in various industry interest groups.


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Item 7A.   Quantitative and Qualitative Disclosures About Market Risk.
 
We use a number of quantitative tools to manage our exposure to market risk. These tools include:
 
  •  inventory position and exposure limits, on a gross and net basis;
 
  •  scenario analyses, stress tests and other analytical tools that measure the potential effects on our trading net revenues of various market events, including, but not limited to, a large widening of credit spreads, a substantial decline in equities markets and significant moves in selected emerging markets; and
 
  •  risk limits based on a summary measure of risk exposure referred to as Value at Risk.
 
Value at Risk
 
We estimate Value at Risk (VaR) using a model that simulates revenue and loss distributions on all financial instruments by applying historical market changes to the current portfolio. Using the results of this simulation, VaR measures potential loss of trading revenues at a given confidence level over a specified time horizon. We calculate VaR over a one day holding period measured at a 95% confidence level which implies that, on average, we expect to realize a loss of daily trading revenue at least as large as the VaR amount on one out of every twenty trading days.
 
VaR is one measurement of potential loss in trading revenues that may result from adverse market movements over a specified period of time with a selected likelihood of occurrence. As with all measures of VaR, our estimate has substantial limitations due to our reliance on historical performance, which is not necessarily a predictor of the future. Consequently, this VaR estimate is only one of a number of tools we use in our daily risk management activities.
 
VaR is a model that predicts the future risk based on historical data. We could incur losses greater than the reported VaR because the historical market prices and rates changes may not be an accurate measure of future market events and conditions. In addition, the VaR model measures the risk of a current static position over a one day horizon and might not predict the future position. When comparing our VaR numbers to those of other firms, it is important to remember that different methodologies could produce significantly different results.
 
The VaR numbers below are shown separately for interest rate, equity, currency and commodity products, as well as for our overall trading positions, excluding corporate investments in asset management positions, using a historical simulation approach. The aggregated VaR presented here is less than the sum of the individual components (i.e., interest rate risk, foreign exchange rate risk, equity risk and commodity price risk) due to the benefit of diversification among the risk categories. Diversification benefit equals the difference between aggregated VaR and the sum of VaRs for the four risk categories. The following table illustrates the VaR for each component of market risk.
 
                                                                 
    Daily VaR(1) Value at Risk in Trading Portfolios  
          Eleven Months
       
    At Year end     ended 11-30-2010     Year ended 12-31-2009  
Risk Categories   2010     2009     Average     High     Low     Average     High     Low  
                      (In millions)                    
 
Interest Rates
  $ 4.24     $ 2.66     $ 6.35     $ 11.75     $ 2.88     $ 5.32     $ 10.55     $ 2.37  
Equity Prices
  $ 3.38     $ 4.33     $ 4.87     $ 13.40     $ 2.38     $ 3.81     $ 10.69     $ 1.13  
Currency Rates
  $ 0.39     $ 0.86     $ 0.50     $ 1.52     $ 0.09     $ 0.60     $ 3.89     $ 0.06  
Commodity Prices
  $ 2.20     $ 1.91     $ 1.46     $ 3.27     $ 0.60     $ 1.17     $ 3.50     $ 0.29  
Diversification Effect
  $ (2.94 )   $ (2.83 )   $ (4.56 )               $ (4.76 )            
                                                                 
Firmwide
  $ 7.27     $ 6.93     $ 8.62     $ 17.41     $ 4.05     $ 6.14     $ 11.54     $ 3.48  
                                                                 
 
 
(1) VaR is the potential loss in value of our trading positions due to adverse market movements over a defined time horizon with a specific confidence level. For the VaR numbers reported above, a one-day time horizon and 95% confidence level were used.


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Average VaR of $8.62 million during the eleven months ended November 30, 2010 increased from the $6.14 million average during the twelve months ended December 31, 2009 due mainly to an increase in exposure to Equity Prices and Interest Rates, primarily attributed to certain equity and debt block trading positions executed in connection with certain capital markets activities during the first quarter of 2010.
 
The following table presents our daily VaR over the last periods:
 
 
During the three months ended March 31, 2010, VaR trended higher from certain equity and debt blocking trading positions executed primarily in connection with certain capital market activities. During the latter part of 2010, the low interest rate environment increased uncertainty surrounding mortgage prepayment speeds, which impacted daily VaR.
 
The comparison of actual daily net revenue fluctuations with the daily VaR estimate is the primary method used to test the efficacy of the VaR model. This is performed at various levels of the trading portfolio, from the holding company level down to specific business lines. At a 95% confidence one day VaR model, net trading losses would not be expected to exceed VaR estimates more than twelve times (1 out of 20 days) on an annual basis. Fees, commissions, and certain provisions are excluded for the purpose of this comparison. Results of the process at the aggregate level demonstrated two days when the net trading loss exceeded the 95% one day VaR in the eleven months ended November 30, 2010. The graph below illustrates the relationship between daily net trading revenue and daily VaR for us in the eleven months ended November 30, 2010.


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Daily Net Trading Revenue
($ in millions)
 
The table below shows the distribution of daily net trading revenue for substantially all of our trading activities.
 
(LINE GRAPH)


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Item 8.   Financial Statements and Supplementary Data.
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
         
    Page
 
    53  
    54  
    55  
    56  
    57  
    58  
    59  
    60  
    61  
    64  


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Management’s Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Management evaluated our internal control over financial reporting as of November 30, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. As a result of this assessment and based on the criteria in this framework, management has concluded that, as of November 30, 2010, our internal control over financial reporting was effective.
 
Deloitte & Touche LLP, our independent registered public accounting firm, has audited the financial statements included in this transition report on Form 10-K and has issued a report on our internal control over financial reporting, which appears on page 54.


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of Jefferies Group, Inc.
 
New York, NY
 
We have audited the internal control over financial reporting of Jefferies Group, Inc., and subsidiaries (the “Company”), as of November 30, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of November 30, 2010, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the eleven month period ended November 30, 2010 of the Company and our report dated February 2, 2011 expressed an unqualified opinion on those financial statements and includes an explanatory paragraph concerning the Company changing its fiscal year end from December 31 to November 30 and an explanatory paragraph concerning the adoption of Financial Accounting Standards Board accounting guidance that addresses consolidation of variable interest entities.
 
/s/ Deloitte & Touche LLP
 
New York, NY
February 2, 2011


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Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders
Jefferies Group, Inc.:
 
We have audited the accompanying consolidated statement of financial condition of Jefferies Group, Inc. and subsidiaries (the Company) as of December 31, 2009, and the related consolidated statements of earnings, changes in stockholders’ equity, comprehensive income and cash flows for each of the years in the two-year period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jefferies Group, Inc. and subsidiaries as of December 31, 2009, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
 
/s/ KPMG LLP
 
New York, New York
February 26, 2010
(February 2, 2011 as to the effects of correcting the 2009 and 2008 consolidated financial statements described in Note 1)


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of Jefferies Group, Inc.:
 
We have audited the accompanying consolidated statement of financial condition of Jefferies Group, Inc. and subsidiaries (the “Company”) as of November 30, 2010, and the related consolidated statements of earnings, stockholders’ equity, comprehensive income, and cash flows for the eleven month period ended November 30, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
 
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Jefferies Group, Inc. and subsidiaries at November 30, 2010, and the results of their operations and their cash flows for the eleven month period ended November 30, 2010, in conformity with accounting principles generally accepted in the United States of America.
 
As discussed in Note 1 to the consolidated financial statements, the Company changed its fiscal year end from December 31 to November 30.
 
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2010, the Company adopted Financial Accounting Standards Board accounting guidance that addresses the consolidation of variable interest entities.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of November 30, 2010, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 2, 2011 expressed an unqualified opinion on the Company’s internal control over financial reporting.
 
/s/ Deloitte & Touche LLP
 
New York, New York
February 2, 2011


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JEFFERIES GROUP, INC. AND SUBSIDIARIES
 
Consolidated Statement of Financial Condition
 
                 
    November 30,
    December 31,
 
    2010(1)     2009  
    (Dollars in thousands, except per share amounts)  
 
ASSETS
Cash and cash equivalents (including $202,565 from VIEs)
  $ 2,188,998     $ 1,853,167  
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations
    1,636,755       1,089,803  
Financial instruments owned, at fair value, including securities pledged of $12,338,728 and $5,623,345 in 2010 and 2009, respectively:
               
Corporate equity securities (including $120,606 from VIEs)
    1,565,793       1,500,042  
Corporate debt securities (including $462,462 from VIEs)
    3,630,616       2,412,134  
Government, federal agency and other sovereign obligations
    5,191,973       1,762,643  
Mortgage- and asset-backed securities (including $43,355 from VIEs)
    4,921,565       3,089,435  
Loans and other receivables (including $362,465 from VIEs)
    434,573       591,208  
Derivatives (including $7,579 from VIEs)
    119,268       62,117  
Investments, at fair value (including $15,612 from VIEs)
    77,784       70,156  
                 
Total financial instruments owned, at fair value (including $1,012,079 from VIEs)
    15,941,572       9,487,735  
Investments in managed funds
    131,585       115,774  
Other investments
    220,323       193,628  
Securities borrowed
    8,152,678       8,237,998  
Securities purchased under agreements to resell
    3,252,322       3,515,247  
Securities received as collateral
    48,616        
Receivables:
               
Brokers, dealers and clearing organizations (including $195,485 from VIEs)
    2,550,234       1,504,480  
Customers
    1,328,365       1,020,480  
Fees, interest and other (including $127 from VIEs)
    165,603       108,749  
Premises and equipment
    142,729       140,132  
Goodwill
    364,964       364,795  
Other assets (including $370 from VIEs)
    601,799       489,035  
                 
Total assets (including $1,410,626 from VIEs)
  $ 36,726,543     $ 28,121,023  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Financial instruments sold, not yet purchased, at fair value:
               
Corporate equity securities (including $2,708 from VIEs)
  $ 1,638,372     $ 1,360,528  
Corporate debt securities (including $443,100 from VIEs)
    2,375,925       1,909,781  
Government, federal agency and other sovereign obligations
    4,735,288       1,735,861  
Mortgage- and asset-backed securities
    129,384       21,474  
Loans (including $150,100 from VIEs)
    171,278       363,080  
Derivatives (including $136 from VIEs)
    59,552       18,427  
                 
Total financial instruments sold, not yet purchased, at fair value (including $596,044 from VIEs)
    9,109,799       5,409,151  
Securities loaned
    3,108,977       3,592,836  
Securities sold under agreements to repurchase
    10,684,056       8,239,117  
Obligation to return securities received as collateral
    48,616        
Payables:
               
Brokers, dealers and clearing organizations (including $157,134 from VIEs)
    1,885,357       905,350  
Customers
    3,716,357       3,246,485  
Accrued expenses and other liabilities (including $94,402 from VIEs)
    1,142,850       936,242  
Long-term debt
    3,778,681       2,729,117  
Mandatorily redeemable convertible preferred stock
    125,000       125,000  
Mandatorily redeemable preferred interest of consolidated subsidiaries (including $315,885 from VIEs)
    315,885       318,047  
                 
Total liabilities (including $1,163,465 from VIEs)
    33,915,578       25,501,345  
                 
STOCKHOLDERS’ EQUITY
               
Common stock $.0001 par value. Authorized 500,000,000 shares; issued 200,301,656 shares in 2010 and 187,855,347 shares in 2009
    20       19  
Additional paid-in capital
    2,218,123       2,036,087  
Retained earnings
    850,654       688,039  
Less:
               
Treasury stock, at cost, 28,607,510 shares in 2010 and 22,217,793 shares in 2009
    (539,530 )     (384,379 )
Accumulated other comprehensive loss:
               
Currency translation adjustments
    (42,859 )     (34,369 )
Additional minimum pension liability
    (8,419 )     (7,257 )
                 
Total accumulated other comprehensive loss
    (51,278 )     (41,626 )
                 
Total common stockholders’ equity
    2,477,989       2,298,140  
Noncontrolling interests
    332,976       321,538  
                 
Total stockholders’ equity
    2,810,965       2,619,678  
                 
Total liabilities and stockholders’ equity
  $ 36,726,543     $ 28,121,023  
                 
 
 
(1) Upon adoption of accounting changes described in ASC 810 effective January 1, 2010, we are required to separately identify the amounts included in our assets and liabilities that are attributed to consolidated variable interest entities (“VIEs”). We have chosen to present these amounts parenthetically in the financial statement line item for assets and liabilities at November 30, 2010. No comparative separate identification has been provided for assets and liabilities of consolidated VIEs at December 31, 2009.
 
See accompanying notes to Consolidated Financial Statements.


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Consolidated Statement of Earnings
 
                         
    Eleven Months
    Twelve Months
 
    Ended
    Ended
 
    November 30,
    December 31,  
    2010     2009     2008  
    (In thousands, except per share amounts)  
 
Revenues:
                       
Commissions
  $ 466,246     $ 512,293     $ 611,823  
Principal transactions
    509,070       838,396       (80,479 )
Investment banking
    890,334       474,315       425,887  
Asset management fees and investment income (loss) from managed funds
    16,785       35,887       (52,929 )
Interest
    852,494       732,250       741,559  
Other
    62,417       38,918       28,573  
                         
Total revenues
    2,797,346       2,632,059       1,674,434  
                         
Interest expense
    605,096       468,798       660,448  
Net revenues
    2,192,250       2,163,261       1,013,986  
                         
Interest on mandatorily redeemable preferred interest of consolidated subsidiaries
    14,916       37,248       (69,077 )
                         
Net revenues, less mandatorily redeemable preferred interest
    2,177,334       2,126,013       1,083,063  
                         
Non-interest expenses:
                       
Compensation and benefits
    1,282,644       1,195,971       1,522,157  
Floor brokerage and clearing fees
    110,835       80,969       64,834  
Technology and communications
    160,987       141,233       127,357  
Occupancy and equipment rental
    68,085       72,824       76,255  
Business development
    62,015       37,614       49,376  
Professional services
    49,080       41,125       46,948  
Other
    47,017       48,530       84,296  
                         
Total non-interest expenses
    1,780,663       1,618,266       1,971,223  
                         
Earnings (loss) before income taxes
    396,671       507,747       (888,160 )
Income tax expense (benefit)
    156,404       195,928       (293,359 )
                         
Net earnings (loss)
    240,267       311,819       (594,801 )
Net earnings (loss) to noncontrolling interests
    16,601       36,537       (53,884 )
                         
Net earnings (loss) to common shareholders
  $ 223,666     $ 275,282     $ (540,917 )
                         
Earnings (loss) per common share:
                       
Basic
  $ 1.10     $ 1.36     $ (3.30 )
Diluted
  $ 1.09     $ 1.35     $ (3.30 )
Weighted average common shares:
                       
Basic
    196,393       200,446       166,163  
Diluted
    200,511       204,572       166,163  
 
See accompanying notes to Consolidated Financial Statements.


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Consolidated Statement of Changes in Stockholders’ Equity
 
                         
    Eleven Months
    Twelve Months
 
    Ended
    Ended
 
    November 30,
    December 31,  
    2010     2009     2008  
    (Dollars in thousands, except per share amounts)  
 
Common stock, par value $0.0001 per share
                       
Balance, beginning of period
  $ 19     $ 17     $ 16  
Issued
    1       2       1  
                         
Balance, end of period
    20       19       17  
                         
Additional paid-in capital
                       
Balance, beginning of period
    2,036,087       1,870,120       1,115,011  
Benefit plan share activity(1)
    19,230       16,499       52,912  
Share-based expense, net of forfeitures and clawbacks
    149,799       125,127       561,661  
Proceeds from exercise of stock options
    108       69       840  
Acquisitions and contingent consideration
    419       (2,710 )     5,647  
Tax benefit (deficiency) for issuance of share-based awards
    2,965       (14,606 )     6,233  
Equity component of convertible debt issuance, net of tax
          41,588        
Issuance of treasury stock
                90,160  
Dividend equivalents on share-based plans
    9,515             37,656  
                         
Balance, end of period
    2,218,123       2,036,087       1,870,120  
                         
Retained earnings
                       
Balance, beginning of period
    688,039       412,757       1,030,865  
Net earnings (loss) to common shareholders
    223,666       275,282       (540,917 )
Dividends
    (61,051 )           (76,477 )
Acquisition adjustment
                (714 )
                         
Balance, end of period
    850,654       688,039       412,757  
                         
Treasury stock, at cost
                       
Balance, beginning of period
    (384,379 )     (115,190 )     (394,406 )
Purchases
    (140,071 )     (263,794 )     (21,765 )
Returns/forfeitures
    (15,080 )     (8,105 )     (42,438 )
Issued
          2,710       343,419  
                         
Balance, end of period
    (539,530 )     (384,379 )     (115,190 )
                         
Accumulated other comprehensive (loss) income
                       
Balance, beginning of period
    (41,626 )     (52,121 )     9,159  
Currency adjustment
    (8,490 )     9,306       (54,661 )
Pension adjustment, net of tax
    (1,162 )     1,189       (6,619 )
                         
Balance, end of period
    (51,278 )     (41,626 )     (52,121 )
                         
Total common stockholders’ equity
    2,477,989       2,298,140       2,115,583  
                         
Noncontrolling interests
                       
Balance, beginning of period
    321,538       287,805       249,380  
Net earnings (loss) to noncontrolling interests
    16,601       36,537       (53,884 )
Contributions
    12,433       2,860       99,725  
Distributions
    (15,177 )     (5,664 )     (11,553 )
Deconsolidation of asset management entity
    (5,477 )            
Consolidation of asset management entity
                4,137  
Adoption of accounting changes to ASC 810
    3,058              
                         
Balance, end of period
    332,976       321,538       287,805  
                         
Total stockholders’ equity
  $ 2,810,965     $ 2,619,678     $ 2,403,388  
                         
 
 
(1) Includes grants related to the Incentive Plan, Deferred Compensation Plan, and Directors’ Plan.
 
See accompanying notes to Consolidated Financial Statements.


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Consolidated Statement of Comprehensive Income
 
                         
    Eleven Months
    Twelve Months
 
    Ended
    Ended
 
    November 30,
    December 31,  
    2010     2009     2008  
    (Dollars in thousands)  
 
Net earnings (loss) to common shareholders
  $ 223,666     $ 275,282     $ (540,917 )
                         
Other comprehensive (loss) income:
                       
Currency translation adjustments
    (8,490 )     9,306       (54,661 )
Minimum pension liability adjustments, net of tax(1)
    (1,162 )     1,189       (6,619 )
                         
Total other comprehensive (loss) income(2)
    (9,652 )     10,495       (61,280 )
                         
Comprehensive income (loss)
  $ 214,014     $ 285,777     $ (602,197 )
                         
 
 
(1) Includes income tax (benefit) expense of $(0.8) million, $0.8 million and $(4.3) million for the eleven months ended November 30, 2010 and twelve months ended December 31, 2009 and December 31, 2008, respectively.
 
(2) Total other comprehensive (loss) income, net of tax, is attributable to common shareholders. No other comprehensive (loss) income is attributable to noncontrolling interests.
 
See accompanying notes to Consolidated Financial Statements.


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JEFFERIES GROUP, INC. AND SUBSIDIARIES
 
Consolidated Statements of Cash Flows
 
                         
    Eleven Months
    Twelve Months
 
    Ended
    Ended
 
    November 30,
    December 31,  
    2010     2009     2008  
    (Dollars in thousands)  
 
Cash flows from operating activities:
                       
Net earnings (loss)
  $ 240,267     $ 311,819     $ (594,801 )
                         
Adjustments to reconcile net earnings (loss) to net cash (used in) provided by operating activities:
                       
Depreciation and amortization
    42,087       40,662       29,482  
Gain on repurchase of long-term debt
          (7,673 )      
Fees related to assigned management agreements
    (3,590 )            
Interest on mandatorily redeemable preferred interests of consolidated subsidiaries
    14,916       37,248       (69,077 )
Accruals related to various benefit plans and stock issuances, net of estimated forfeitures
    153,950       133,523       572,136  
Deferred income taxes
    4,389       10,147       (180,706 )
(Increase) decrease in cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations
    (546,793 )     61,620       (535,091 )
(Increase) decrease in receivables:
                       
Brokers, dealers and clearing organizations
    (1,062,106 )     (752,108 )     (248,967 )
Customers
    (321,008 )     (474,181 )     256,920  
Fees, interest and other
    (57,482 )     (21,566 )     66,118  
Decrease in securities borrowed
    52,634       764,577       7,395,756  
(Increase) decrease in financial instruments owned
    (6,434,698 )     (4,781,858 )     987,021  
Increase in other investments
    (27,443 )     (53,616 )     (61,297 )
(Increase) decrease in investments in managed funds
    (9,833 )     (15,529 )     196,691  
Decrease (increase) in securities purchased under agreements to resell
    266,132       (2,268,338 )     2,125,292  
(Increase) decrease in other assets
    (123,933 )     22,516       169,348  
Increase (decrease) in payables:
                       
Brokers, dealers and clearing organizations
    1,001,155       506,073       (471,398 )
Customers
    467,164       1,476,096       337,771  
(Decrease) increase in securities loaned
    (455,750 )     333,261       (4,421,889 )
Increase (decrease) in financial instruments sold, not yet purchased
    3,685,421       2,664,934       (567,777 )
Increase (decrease) in securities sold under agreements to repurchase
    2,444,802       1,511,871       (4,598,172 )
Increase (decrease) in accrued expenses and other liabilities
    218,255       373,602       (39,732 )
                         
Net cash (used in) provided by operating activities
    (451,464 )     (126,920 )     347,628  
                         
Cash flows from investing activities:
                       
Net payments on premises and equipment
    (38,426 )     (37,483 )     (35,957 )
Deconsolidation of asset management entity
    (407 )           (63,665 )
Business acquisition
          (38,760 )      
Purchase of mortgage servicing rights
          (8,628 )      
Cash received from contingent consideration
    2,930              
Cash paid for contingent consideration
    (8,332 )     (28,653 )     (37,670 )
                         
Net cash used in investing activities
    (44,235 )     (113,524 )     (137,292 )
                         


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JEFFERIES GROUP, INC. AND SUBSIDIARIES
 
Consolidated Statements of Cash Flows — (Continued)
 
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