--Jefferies' lead role in Knight deal began with an email from its chief executive to Knight CEO
--Investment bank chosen to lead Knight's rescue plan given its experience navigating market turmoil
--Jefferies was one of the firms that provided funding Friday to Knight, helping it stay in business
(Updates with information on Jefferies' role in the rescue plan and comments from Knight CEO throughout.)
By Brett Philbin
Jefferies Group Inc.'s (JEF) top executives played a lead role in saving Knight Capital Group Inc. (KCG) as it faced demise over the past five days, including extending funds that helped the trading firm stay in business last Friday, according to people familiar with the situation.
The involvement of Jefferies Chief Executive Richard Handler and the firm's executive-committee chairman, Brian Friedman, in structuring a $400 million injection for Knight, announced Monday morning, began with an email from Mr. Handler to Knight's chief executive, Thomas Joyce, last Wednesday.
As Mr. Joyce recalled it on Monday, the email said, "I see what's going on. Give me a call. I have some ideas about how we can help."
The two executives spoke later that night, and Mr. Handler, who was working from Europe, told Mr. Joyce his investment bank was in a good position to help Knight Capital. Mr. Handler cited Jefferies' own experience navigating market turmoil, something it had faced just nine months earlier.
In November, Mr. Handler was on the other side, taking calls from clients worried about Jefferies' future as investors speculated the firm might sink in the wake of the failure of rival MF Global Holdings Ltd. (MFGLQ). Jefferies was able to restore market confidence, in part by responding quickly to questions about its exposure to debt issued by weaker European governments and by increasing its public disclosures.
Following the conversation between Mr. Joyce and Mr. Handler last Wednesday, Mr. Handler enlisted Mr. Friedman, a veteran investment banker, to advise Knight's executives on ways to address the company's liquidity issues. A huge capital hole had emerged after erroneous stock trades were executed Wednesday morning.
Jefferies is to become Knight's largest shareholder based on the terms of a rescue deal sealed Monday morning. That pact outlines a $400 million investment to keep Knight afloat, $100 million of which comes from Jefferies, one of the people familiar with the situation said.
Usual trading partners, including online brokerage E*Trade Financial Corp. (ETFC) and large fund company Vanguard Group Inc., declined to send orders to Knight Capital for three days last week after the trading firm disclosed a technology glitch that led to the errant stock trades, which ultimately cost Knight $440 million. The funding announced Monday led several customers who had stopped trading with Knight, such as E*Trade and Vanguard, to resume routing some orders to the firm.
Prior to finalizing the $400 million rescue plan, Knight had received aid from Jefferies last week. Jefferies was one of the firms that provided funding to Knight in the securities-lending market even as other trading partners backed away from doing business with it, the people familiar with the situation said.
Jefferies' assistance to Knight was fueled in part by the professional relationship between Mr. Handler and Mr. Joyce, who have known each other since Mr. Joyce became chief executive of Knight in May 2002.
Following a conversation Wednesday evening, Mr. Friedman arrived early Thursday at Knight's Jersey City, N.J., office, where he set up shop in an office two doors down from Mr. Joyce.
In an interview, Mr. Joyce said, "These guys were on site giving us very distinct guidance since they had been through it, they experienced it."
Mr. Friedman was among a handful of top financial-services executives, including TD Ameritrade Holding Corp. (AMTD) Chief Executive Fred Tomczyk, who were involved in negotiations with Knight. Several of the executives spent much of the weekend at the firm's headquarters, these people said.
As Knight scrambled to find potential solutions to its capital problems over the weekend, Mr. Joyce remained in constant contact with Mr. Handler, while Mr. Friedman spent at least 10 hours each day at the firm.
Beyond Jefferies and TD Ameritrade, the investor group providing funding for Knight included trading firm Getco LLC, as well as Stifel Financial Corp. (SF), Blackstone Group LP (BX) and Stephens, the investment arm of Arkansas's Stephens Inc.
Write to Brett Philbin at brett.philbin@dowjones.com
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