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Section 1: 10-KT (10-KT JEFFERIES FINANCIAL GROUP 2018 FORM 10-K)

JFG-2018 11.30.10K Combined Document


 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-K
¨ 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
                                                               For the fiscal year ended ________________
or
x
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from January 1, 2018 to November 30, 2018
Commission file number:  1-5721
JEFFERIES FINANCIAL GROUP INC.
(Exact Name of Registrant as Specified in its Charter)
New York
13-2615557
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
520 Madison Avenue
New York, New York 10022
(212) 460-1900
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Shares, par value $1 per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes ¨  No  x
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 x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 x   No  ¨
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 statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x     Accelerated filer ☐         Non-accelerated filer ☐
                    
Smaller reporting company ☐     Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes ¨  No x
Aggregate market value of the voting stock of the registrant held by non-affiliates of the registrant at June 30, 2018 (computed by reference to the last reported closing sale price of the Common Shares on the New York Stock Exchange on such date):  $6,974,359,578.
On January 18, 2019, the registrant had outstanding 305,716,112 Common Shares.

DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the registrant's Definitive Proxy Statement pursuant to Regulation 14A of the Securities Exchange Act of 1934 in connection with the 2019 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.

LOCATION OF EXHIBIT INDEX
The index of exhibits is contained in Part IV on page 63.

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PART I
Item 1.
Business.
Overview
Jefferies Financial Group Inc. ("Jefferies" or the "Company"), formerly known as Leucadia National Corporation, is a diversified financial services company engaged in investment banking and capital markets, asset management and direct investing. Jefferies Group LLC ("Jefferies Group"), our largest subsidiary, is the largest independent full-service global investment banking firm headquartered in the U.S. Jefferies Group retains a credit rating separate from Jefferies and remains a U.S. Securities and Exchange Commission ("SEC") reporting company.
Our executive offices are located at 520 Madison Avenue, New York, NY 10022, as is the global headquarters of Jefferies Group. Our primary telephone number is (212) 460-1900 and our website address is www.jefferies.com. At November 30, 2018, we had approximately 4,700 full-time employees.
The following discussion should be read in conjunction with the Risk Factors presented in Item 1A of Part I and the Cautionary Statement for Forward-Looking Information and Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 7 of Part II.
Recent Events
On June 5, 2018, we completed the sale of 48% of National Beef to Marfrig Global Foods S.A. ("Marfrig") for $907.7 million in cash, reducing our ownership in National Beef from 79% to 31%. In 2018, we recognized a pre-tax gain as a result of this transaction of $873.5 million. During 2018, prior to the closing, we received an additional $229.4 million in distributions of recent profits plus a true-up to the debt amount set in the enterprise valuation associated with the sale. Marfrig also acquired an additional 3% of National Beef from other equity owners and owns 51% of National Beef. We have the right to designate two board members and have a series of other rights in respect of our continuing equity interest, with a lockup period of five years and thereafter fair market value liquidity protections. As of the closing of the sale on June 5, 2018, we deconsolidated our investment in National Beef and account for our remaining 31% interest in National Beef under the equity method of accounting. We have classified the results of National Beef prior to June 5, 2018 and the pre-tax gain as discontinued operations in the Consolidated Statements of Operations.
During the third quarter of 2018, we sold 100% of our equity interests in Garcadia, our auto dealer group, and our associated real estate to our former partners, the Garff family, for $417.2 million in cash. We recognized a pre-tax gain as a result of this transaction of $221.7 million during 2018.

These sales and particularly the related deconsolidation of National Beef transformed Jefferies into a more focused financial services company. To further this strategy, on October 1, 2018, we amalgamated all our primary financial services operating businesses into one platform by transferring our 50% membership interest in Berkadia and our Leucadia Asset Management ("LAM") seed investments into Jefferies Group. The balance of our businesses and investments comprise our Merchant Banking business, including our interests in National Beef, Spectrum Brands (formerly HRG Group), Vitesse Energy Finance, HomeFed, Linkem and other companies.

During 2018, we repurchased a total of 50,000,000 of our common shares for $1,143.0 million at an average price per share of $22.86.

In the fourth quarter of 2018, we changed our fiscal year end from December 31 to November 30, aligning our fiscal year end with that of Jefferies Group.

Jefferies Group
Jefferies Group is the largest independent U.S. headquartered global full-service, integrated investment banking and securities firm. Jefferies Group's largest subsidiary, Jefferies LLC, was founded in the U.S. in 1962 and its first international operating subsidiary, Jefferies International Limited, was established in the U.K. in 1986. As of November 30, 2018, Jefferies Group had 3,596 employees in the Americas, Europe and Asia. The net book value (assets less liabilities and noncontrolling interests) of our investment in Jefferies Group was $6.2 billion at November 30, 2018.

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Investment Banking
Jefferies Group provides its clients around the world with a full range of equity capital markets, debt capital markets and financial advisory services. Jefferies Group's services are enhanced by its deep industry expertise, its global distribution capabilities and its senior level commitment to its clients.
Approximately 900 investment banking professionals operate in the Americas, Europe and Asia, and are organized into industry, product and geographic coverage groups. Jefferies Group's industry coverage groups include Consumer and Retail; Energy; Financial Institutions; Healthcare; Industrials; Media, Communications and Information Services; Real Estate; Gaming and Lodging; Technology; Financial Sponsors; and Public Finance. Jefferies Group's product coverage groups include equity capital markets, debt capital markets, and advisory, which includes both mergers and acquisitions and restructuring and recapitalization expertise. Jefferies Group's geographic coverage groups include teams based in major cities in the United States, Toronto, London, Frankfurt, Paris, Milan, Amsterdam, Stockholm, Mumbai, Hong Kong, Singapore, Sydney, Tokyo and Zurich.
Equity Capital Markets
Jefferies Group provides a broad range of equity financing capabilities to companies and financial sponsors. These capabilities include private equity placements, initial public offerings, follow-on offerings, block trades and equity-linked convertible securities transactions.
Debt Capital Markets
Jefferies Group provides a wide range of debt and acquisition financing capabilities for companies, financial sponsors and government entities. Jefferies Group focuses on structuring, underwriting and distributing public and private debt, including investment grade debt, high yield bonds, leveraged loans, municipal debt, mortgage- and other asset-backed securities, and liability management solutions.
Advisory Services
Jefferies Group provides mergers and acquisition and restructuring and recapitalization services to companies, financial sponsors and government entities. In the mergers and acquisition area, Jefferies Group advises sellers and buyers on corporate sales and divestitures, acquisitions, mergers, tender offers, spinoffs, joint ventures, strategic alliances and takeover and proxy fight defense. In the restructuring and recapitalization area, Jefferies Group provides companies, bondholders and lenders a full range of restructuring advisory capabilities as well as expertise in the structuring, valuation and placement of securities issued in recapitalizations.
Corporate Lending
Jefferies Finance LLC ("Jefferies Finance"), a 50/50 joint venture between Jefferies Group and Massachusetts Mutual Life Insurance Company, is a commercial finance company that structures, underwrites and syndicates primarily senior secured loans to corporate borrowers and manages proprietary and third-party investments in middle market and broadly syndicated loans. Since its inception in 2004, Jefferies Finance has served as lead arranger of over 950 transactions representing over $195 billion in arranged volume. Jefferies Finance conducts its operations primarily through two business lines, Leveraged Finance Arrangement and Portfolio and Asset Management. Its Leveraged Finance Arrangement business line participates in transactions typically ranging from $250 million to $1.5 billion for borrowers generating between $50 million and $300 million of annual Earnings before interest, taxes, depreciation and amortization. Jefferies Finance typically syndicates to third party investors substantially all of its arranged volume. Its Portfolio and Asset Management business line manages a broad portfolio comprised of portions of loans it has arranged as well as loan positions that it has purchased in the primary and secondary markets. The Portfolio and Asset Management business is comprised of three registered Investment Advisers: Jefferies Finance, Apex Credit Partners LLC and JFIN Asset Management LLC. Jefferies Finance manages its investments in cash flow and traditional asset-based revolving credit. Apex Credit Partners LLC manages collateralized loan obligations which invest in predominately broadly syndicated loans. JFIN Asset Management LLC manages proprietary and third-party investments in middle market loans held in private funds and separately managed accounts.

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Equities
Equities Research, Sales and Trading
Jefferies Group provides its clients full-service equities research, sales and trading capabilities across global securities markets. Jefferies Group earns commissions or spread revenue by executing, settling and clearing transactions for clients across these markets in equity and equity-related products, including common stock, American depository receipts, global depository receipts, exchange-traded funds, exchange-traded and over-the-counter ("OTC") equity derivatives, convertible and other equity-linked products and closed-end funds. Jefferies Group equity research, sales and trading efforts are organized across three geographical regions: the Americas; Europe and the Middle East and Africa; and Asia Pacific. Jefferies Group's clients are primarily institutional market participants such as mutual funds, hedge funds, investment advisers, pension and profit sharing plans, and insurance companies. Through its global research team and sales force, Jefferies Group maintains relationships with its clients, distributes investment research and strategy, trading ideas, market information and analyses across a range of industries and receives and executes client orders. Jefferies Group's equity research covers over 2,000 companies around the world and a further more than 800 companies are covered by nine leading local firms in Asia Pacific with which Jefferies Group maintains alliances.
Equity Finance
Jefferies Group's Equity Finance business provides financing, securities lending and other prime brokerage services. Jefferies Group offers prime brokerage services in the U.S. that provide hedge funds, money managers and registered investment advisers with execution, financing, clearing, reporting and administrative services. Jefferies Group finances its clients' securities positions through margin loans that are collateralized by securities, cash or other acceptable liquid collateral. Jefferies Group earns an interest spread equal to the difference between the amount Jefferies Group pays for funds and the amount Jefferies Group receives from its clients. Jefferies Group also operates a matched book in equity and corporate bond securities, whereby Jefferies Group borrows and lends securities versus cash or liquid collateral and earns a net interest spread. Jefferies Group offers selected prime brokerage clients the option of custodying their assets at an unaffiliated U.S. broker-dealer that is a subsidiary of a bank holding company. Under this arrangement, Jefferies Group directly provides its clients with all customary prime brokerage services.
Wealth Management
Jefferies Group provides tailored wealth management services designed to meet the needs of high net worth individuals, their families and their businesses, private equity and venture funds and small institutions. Jefferies Group's advisers provide access to all of its institutional execution capabilities and delivers other financial services. Jefferies Group's open architecture platform affords clients access to products and services from both its firm and from a variety of other major financial services institutions.
Fixed Income
Fixed Income Sales and Trading
Jefferies Group provides its clients with sales and trading of investment grade corporate bonds, U.S. and European government and agency securities, municipal bonds, mortgage- and asset-backed securities, leveraged loans, consumer loans, high yield and distressed securities, emerging markets debt, interest rate and credit derivative products, as well as foreign exchange trade execution and securitization capabilities. Jefferies LLC is designated as a Primary Dealer by the Federal Reserve Bank of New York and Jefferies International Limited is designated in similar capacities for several countries in Europe. Additionally, through the use of repurchase agreements, Jefferies Group acts as an intermediary between borrowers and lenders of short-term funds and obtains funding for various of its inventory positions. Jefferies Group trades and makes markets globally in cleared and uncleared swaps and forwards referencing, among other things, interest rates, investment grade and non-investment grade corporate credits, credit indexes and asset-backed security indexes.
Jefferies Group's strategists and economists provide ongoing commentary and analysis of the global fixed income markets. In addition, Jefferies Group's fixed income desk strategists provide ideas and analysis to clients across a variety of fixed income products.

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Other
Jefferies Group also makes principal investments in private equity and hedge funds managed by third parties as well as, from time to time, take on strategic positions. On October 1, 2018, we transferred to Jefferies Group our investment in Berkadia Commercial Mortgage Holding LLC ("Berkadia"). Berkadia is a 50/50 joint venture with Berkshire Hathaway, Inc. that provides capital solutions, investments sales advisory and mortgage servicing for multifamily and commercial real estate. Berkadia originates commercial real estate loans, primarily in respect of multifamily housing units, for Fannie Mae, Freddie Mac and the Federal Housing Authority using their underwriting guidelines and will typically sell the loans to such entities shortly after the loans are funded with Berkadia retaining the mortgage servicing rights. For loans sold to Fannie Mae, Berkadia assumes a shared loss position throughout the term of each loan, with a maximum loss percentage of approximately one-third of the original principal balance. Berkadia also originates and brokers commercial/multifamily mortgage loans which are not part of the government agency programs.
In addition, Berkadia originates loans for its own balance sheet. These loans provide interim financing to borrowers who intend to refinance the loan with longer-term loans from an eligible government agency or other third party. Berkadia also provides services related to the acquisition and disposition of multifamily real estate projects, including brokerage services, asset review, market research, financial analysis and due diligence support and is a servicer of U.S. commercial real estate loans, performing primary, master and special servicing functions for U.S. government agency programs, commercial mortgage-backed securities transactions, banks, insurance companies and other financial institutions. Berkadia is required under its servicing agreements to maintain certain minimum servicer ratings or qualifications from the ratings agencies. These ratings currently exceed the minimum ratings required by the related servicing agreements.
Asset Management
Jefferies Group manages, invests in and provides services to a diverse group of alternative asset management platforms across a spectrum of investment strategies and asset classes, many of these under the LAM umbrella. Jefferies Group is supporting and developing focused strategies managed by distinct management teams. Products are currently offered by Jefferies Investment Advisers to pension funds, insurance companies, sovereign wealth funds, and other institutional investors through various platforms.
On October 1, 2018, we transferred our LAM seed investments to Jefferies Group. LAM continued to expand its asset management efforts including the formation of strategic relationships with Weiss Multi-Strategy Advisers LLC ("Weiss") and Schonfeld Strategic Advisors LLC ("Schonfeld"). We invested $250 million in Weiss' strategy and own a profit share in the firm for the first year and a revenue share thereafter. In addition, LAM entered into an agreement with Schonfeld to merge the business of Folger Hill Asset Management with Schonfeld's fundamental equities business, under the Schonfeld brand. In connection with the transaction, LAM agreed to make a $250 million investment in the combined strategy, and will receive a revenue share in the combined ongoing fundamental equity business. This transaction closed on January 1, 2019.
Competition
All aspects of Jefferies Group's business are intensely competitive. Jefferies Group competes primarily with large global bank holding companies that engage in capital markets activities, but also with other broker-dealers, asset managers and investment banking firms. The large global bank holding companies have substantially greater capital and resources than Jefferies Group does. Jefferies Group believes that the principal factors affecting its competitive standing include the quality, experience and skills of its professionals, the depth of its relationships, the breadth of its service offerings, its ability to deliver consistently its integrated capabilities, and its culture, tenacity and commitment to serve its clients.
Regulation
Regulation in the United States. The financial services industry in which Jefferies Group operates is subject to extensive regulation. In the U.S., the SEC is the federal agency responsible for the administration of federal securities laws, and the Commodity Futures Trading Commission ("CFTC") is the federal agency responsible for the administration of laws relating to commodity interests (including futures, commodity options and swaps). In addition, the Financial Industry Regulatory Authority ("FINRA") and the National Futures Association ("NFA") are self-regulatory organizations that are actively involved in the regulation of financial services businesses. The SEC, CFTC, FINRA and the NFA conduct periodic examinations of broker-dealers, investment advisers, futures commission merchants ("FCMs") and swap dealers. The designated examining authority for Jefferies LLC's activities as a broker-dealer is FINRA, and the designated self-regulatory organization for Jefferies LLC's non-clearing FCM activities is the NFA. Financial services businesses are also subject to regulation and examination by state securities commissions and attorneys general in those states in which they do business.

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Broker-dealers are subject to SEC and FINRA 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 and requirements, anti-money laundering efforts, recordkeeping and the conduct of broker-dealer personnel, including officers and employees. Registered investment advisers are subject to, among other requirements, SEC regulations concerning marketing, transactions with affiliates, custody of client assets, disclosure to clients, conflict of interest, insider trading and recordkeeping; and investment advisers that are also registered as commodity trading advisers or commodity pool operators are also subject to regulation by the CFTC and the NFA. FCMs, introducing brokers and swap dealers that engage in commodity options, futures or swap transactions are subject to regulation by the CFTC and the NFA. Additional legislation, changes in rules promulgated by the SEC, CFTC, FINRA or NFA, or changes in the interpretation or enforcement of existing laws or rules may directly affect the operations and profitability of broker-dealers, investment advisers, FCMs, commodity trading advisers, commodity pool operators and swap dealers. The SEC, CFTC, FINRA, NFA, state securities commissions and state attorneys general may conduct administrative proceedings or initiate civil litigation that can result in adverse consequences for Jefferies LLC, its affiliates, including affiliated investment advisers, as well as its and their officers and employees (including, without limitation, injunctions, censures, fines, suspensions, directives that impact business operations (including proposed expansions), membership expulsions, or revocations of licenses and registrations). In addition, broker-dealers, investment advisers, FCMs and swap dealers must also comply with the rules and regulation of clearing houses, exchanges, swap execution facilities and trading platforms of which they are a member.
Regulatory Capital Requirements. Several Jefferies Group entities are subject to financial capital requirements that are set by regulation. Jefferies LLC is a dually-registered broker-dealer and FCM and is required to maintain net capital in excess of the greater of the SEC or CFTC minimum financial requirements. As a broker-dealer, Jefferies LLC is subject to the SEC's Uniform Net Capital Rule (the "Net Capital Rule"). Jefferies LLC has elected to compute its minimum net capital requirement in accordance with the "Alternative Net Capital Requirement" as permitted by the Net Capital Rule, which provides that a broker-dealer shall not permit its net capital, as defined, to be less than the greater of 2% of its aggregate debit balances (primarily customer-related receivables) or $250,000 ($1.5 million for prime brokers). Compliance with the Net Capital Rule could limit Jefferies LLC's operations, such as underwriting and trading activities, that could require the use of significant amounts of capital, and may also restrict its ability to make loans, advances, dividends and other payments.
As a non-clearing FCM, Jefferies LLC is required to maintain minimum adjusted net capital of $1.0 million.
Jefferies Group subsidiaries that are provisionally registered swap dealers will become subject to capital requirements under Title VII of The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") once the relevant rules become final. For additional information see Item 1A. Risk Factors.
Jefferies Group is not subject to any regulatory capital rules.
See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 25 to our consolidated financial statements for additional discussion of net capital calculations.
Regulation outside the United States. Jefferies Group is an active participant in the international capital markets and provides investment banking services internationally, primarily in Europe and Asia. As is true in the U.S., Jefferies Group's international subsidiaries are subject to extensive regulations proposed, promulgated and enforced by, among other regulatory bodies, the European Commission and European Supervisory Authorities (including the European Banking Authority and European Securities and Market Authority), U.K. Financial Conduct Authority, German Federal Financial Supervisory Authority, Investment Industry Regulatory Organization of Canada, Hong Kong Securities and Futures Commission, the Japan Financial Services Agency and the Monetary Authority of Singapore. Every country in which Jefferies Group does business imposes upon it laws, rules and regulations similar to those in the U.S., including with respect to some form of capital adequacy rules, customer protection rules, data protection regulations, anti-money laundering and anti-bribery rules, compliance with other applicable trading and investment banking regulations and similar regulatory reform. For additional information see Item 1A. Risk Factors.
Merchant Banking
In our Merchant Banking business, we own a diverse portfolio of businesses and investments that have the potential for significant long-term value creation. We continue to seek new investments with similar characteristics and that typically come to our attention through the activities of Jefferies Group. Investments may be reflected in our consolidated results as consolidated subsidiaries, equity investments, securities or in other ways, depending on the structure of our specific holdings. We periodically evaluate the retention and disposition of our businesses and investments. Changes in the mix of our businesses and investments should be expected.

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Our Merchant Banking portfolio currently includes investments in National Beef Packing Company ("National Beef"), 31% (beef processing); Spectrum Brands Holdings, Inc. ("Spectrum Brands"), 14% (consumer products); Linkem, 54% (fixed wireless broadband services); Vitesse Energy, LLC ("Vitesse Energy Finance"), 97% (oil and gas); HomeFed Corporation ("HomeFed"), 70% (45% voting) (real estate); Idaho Timber, 100% (manufacturing); FXCM Group, LLC ("FXCM"), up to 75% (50% voting) (online foreign exchange trading); WeWork, less than 1% (global network of workspaces); and others. The net book value of our entire Merchant Banking portfolio was $3.3 billion at November 30, 2018.
National Beef
We own 31% of National Beef, one of the largest beef processing companies in the U.S., accounting for approximately 12.5% of the fed cattle slaughter market. National Beef processes and markets fresh and chilled boxed beef, ground beef, beef by-products, consumer-ready beef and pork, and wet blue leather for domestic and international markets. The largest share of National Beef's revenue, about 86%, is generated from the sale of boxed beef and beef by-products. National Beef also generates revenues through value-added production with its case-ready products. National Beef's profitability typically fluctuates seasonally as well as cyclically, based on the availability of fed cattle. The net book value of our investment in National Beef was $653.6 million at November 30, 2018.
Spectrum Brands
We own about 14% of Spectrum Brands, a publicly traded (NYSE: SPB) global and diversified consumer products company and a leading supplier of residential locksets, residential builders' hardware, plumbing, shaving and grooming products, personal care products, small household appliances, specialty pet supplies, lawn and garden and home pest control products, and personal insect repellents. Over the past few months, Spectrum Brands has announced the sale of its consumer battery and auto care segments. We own 7.5 million common shares of Spectrum Brands, which we reflect in Trading assets in our financial statements at fair value. One of our officers currently serves as a director on Spectrum Brands board and we have the right to designate an unaffiliated person to be nominated to serve as independent director on Spectrum Brands board. The net book value of our investment in Spectrum Brands was $374.2 million at November 30, 2018.
Linkem
We own 54% (48% voting) of Linkem S.p.A., a fast-growing fixed wireless broadband service provider in Italy with 586,000 subscribers. Its solution, delivered via radio communications between a base station and indoor or outdoor antennae installed at the customers' premises, utilizes its valuable 3.5GHz spectrum holdings of 84MHz covering over 82% of the population of Italy and at least 42MHz covering all of Italy. Linkem's proprietary network currently utilizes LTE technology and covers approximately 66% of Italian households, while its 3.5GHz frequency band has been designated globally as one of the core bands for 5G services making Linkem well placed to take market share and broaden its service offerings in a challenged Italian infrastructure market. Linkem plans to increase its network coverage and service offerings over the coming years as it adds subscribers and leverages its assets. Expansion and customer acquisition costs are expected to result in operating losses over the next couple of years.
Our initial investment in Linkem was made in July 2011. Since that time, we have funded much of Linkem's growth and become its largest shareholder. We own approximately 42% of the common shares of Linkem, as well as convertible preferred shares which, if converted, would increase our ownership to approximately 54% of Linkem's common equity at November 30, 2018. We have approximately 48% of the total voting securities of Linkem. The net book value of our investment in Linkem was $165.2 million at November 30, 2018
Vitesse Energy Finance
Vitesse Energy Finance is our 97% owned consolidated subsidiary that acquires and invests in non-operated working interests and royalties predominately in the Bakken Shale oil field in North Dakota. These non-operated interests include working interests and minerals in flowing wells and leasehold interests in drilling spacing units expected to be developed in the future by Vitesse Energy Finance's dozen or more operators. As Vitesse Energy Finance's operators convert undeveloped acreage into flowing horizontal wells, our interests in the leasehold acreage and minerals are converted into cash flows produced by the new wells. Vitesse Energy Finance has acquired more than 44,500 net acres of Bakken leaseholds and has an interest in approximately 4,600 producing wells (95 net wells) with current production as of November 2018 in excess of 9,000 barrels of oil equivalent per day. Vitesse Energy Finance also has over 1,150 gross wells (29 net wells) that are currently drilling, completing, shut-in for offset completion activity or permitted for drilling. Our strategic priorities for Vitesse Energy Finance are to selectively add to our core acreage, participate in future profitable horizontal wells, increase aggregate cash flow, limit volatility of cash flow from flowing wells by appropriately hedging oil and profitably sell selective assets when appropriate. The net book value of our investment in Vitesse Energy Finance was $532.8 million at November 30, 2018

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HomeFed
We own 70% of HomeFed, a developer and owner of residential and mixed-use real estate properties in California, New York, Florida, Virginia, South Carolina and Maine. After many years in the entitlement process, the majority of HomeFed's assets are now either operating real estate or entitled land ready for sale. HomeFed is a public company traded on the NASD OTC Bulletin Board (Symbol: HOFD). We own 70% of HomeFed's common stock; however, our voting rights are limited such that we are not able to vote more than 45% of HomeFed's total voting securities voting on any matter. Resulting from a 1998 distribution to all of our shareholders, about 5% of HomeFed is beneficially owned by our Chairman at November 30, 2018. Three of our executives serve on the board of directors of HomeFed, including our Chairman who serves as HomeFed's Chairman, and our President. At November 30, 2018, our investment had a net book value of $337.5 million and we report HomeFed as an equity investment in our financial statements. 
Idaho Timber
Idaho Timber manufactures and distributes an extensive range of quality wood products to markets across North America. Its activities include remanufacturing dimension lumber; remanufacturing, bundling and bar coding of home center boards for large retailers; and production of pine dimension lumber and 5/4" radius-edge, pine decking. In addition to its headquarters in Meridian, Idaho, Idaho Timber has plants in Idaho, Arkansas, Florida, Louisiana, New Mexico, North Carolina and Texas. The net book value of our investment in Idaho Timber was $78.2 million at November 30, 2018.
FXCM
FXCM is a provider of online foreign exchange trading, contract for difference trading, spread betting and related services. Its mission is to provide global traders with access to the world's largest and most liquid market by offering innovative trading tools, hiring excellent trading educators, meeting strict financial standards and striving for the best online trading experience in the market.

During 2015, we invested $279.0 million in FXCM through a combination of a term loan now due in the first quarter of 2019 and rights to up to 75% of all future distributions. We also have the right to appoint three of the six board members of FXCM. We have had the right, as has Global Brokerage Holdings, LLC ("Global Brokerage Holdings"), the owner of the remaining 50% voting interest of FXCM that is not held by Jefferies, to require a sale of FXCM beginning in January 2018. Distributions to Jefferies are currently: 100% until amounts due under the loan are repaid; 50% of the next $350 million; then 90% of the next $600 million; and 60% of all amounts thereafter. Through November 30, 2018, we have received cumulatively $349.8 million of principal, interest and fees from our initial $279.0 million investment in FXCM. At November 30, 2018, the remaining principal due under the term loan was $67.6 million and the interest rate is 20.5%. We include this loan receivable in our Consolidated Statements of Financial Condition in Trading assets at its fair value of $73.2 million. Our 50% voting interest and share of distributions are reflected as an equity method investment and classified as Loans to and investments in associated companies. At November 30, 2018, our equity method investment is recorded at $75.0 million, and the total amount of both our term loan and equity method investment is $148.2 million.
WeWork
Founded in 2010, WeWork creates collaborative office communities that are responsive to the productivity needs and stylistic preferences of today's mobile, creative workforce. WeWork provides incubator-like space with small offices and hip common areas meant to promote interaction. WeWork serves a range of customers, from startups and small businesses to large enterprises. In addition to physical space, the company provides services, events and technologies designed to connect members within the WeWork ecosystem. We invested $9.0 million in 2013 in WeWork and have realized $12.7 million in cash to date. We currently own less than 1% of the company. Our interest in WeWork is reflected in Trading assets in our financial statements and is carried at fair value. The net book value of our investment in WeWork was $254.4 million at November 30, 2018.
Financial Information about Segments
Our operating and reportable segments consist of Jefferies Group, Merchant Banking and Corporate. Our Merchant Banking segment included LAM and Berkadia prior to their transfer to Jefferies Group in the fourth quarter of 2018, and Garcadia, prior to its sale in August 2018. Our financial information regarding our reportable segments is contained in Note 29, in our consolidated financial statements.

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Information about Jefferies on the Internet
We file annual, quarterly and current reports and other information with the SEC. These SEC filings are also available to the public from commercial document retrieval services and the website maintained by the SEC at www.sec.gov.
The following documents and reports are available on or through our website (www.jefferies.com) as soon as reasonably practicable after we electronically file such materials with, or furnish to, the SEC, as applicable:
Code of Business Practice;
Reportable waivers, if any, from our Code of Business Practice by our executive officers;
Board of Directors Corporate Governance Guidelines;
Charter of the Audit Committee of the Board of Directors;
Charter of the Nominating and Corporate Governance 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;
Beneficial ownership reports on Forms 3, 4 and 5; and
Any amendments to the above-mentioned documents and reports.
Shareholders may also obtain a printed copy of any of these documents or reports free of charge by sending a request to Jefferies Financial Group Inc., Investor Relations, 520 Madison Avenue, New York, NY 10022 or by calling (212) 460-1900.
Item 1A.
Risk Factors.
Our business is subject to a number of risks. You should carefully consider the following risk factors, together with all of the other information included or incorporated by reference in this report, before you decide whether to purchase our securities. The risks set out below are not the only risks we face. In addition to the specific risks mentioned in this report, we may also be affected by other factors that affect businesses generally such as global or regional changes in economic, business or political conditions, acts of war, terrorism or natural disasters. If any of such risks occur, our business, financial condition and results of operations could be materially adversely affected. In such case, the trading price of our securities could decline, and you may lose all or part of your investment.
We have also set forth certain specific risks associated with certain of our investments. The inclusion or non-inclusion of these risks for specific investments should not be interpreted to mean that a mentioned or non-mentioned investment is more or less important or material than another. Additionally, some of our investments are in securities of issuers that file reports with the SEC. You should also carefully consider the additional risks disclosed by those issuers with the SEC as those risks may also impact your investment in our securities.
Future acquisitions and dispositions of our businesses and investments are possible, changing the components of our assets and liabilities, and if unsuccessful or unfavorable, could reduce the value of our securities. Any future acquisitions or dispositions may result in significant changes in the composition of our assets and liabilities, as well as our business mix and prospects. Consequently, our financial condition, results of operations and the trading price of our securities may be affected by factors different from those affecting our financial condition, results of operations and trading price at the present time.
We face numerous risks and uncertainties as we expand our business. We expect the growth and development of our business to come primarily from internal expansion and through acquisitions, investments, and strategic partnering. As we expand our business, there can be no assurance that financial controls, the level and knowledge of personnel, operational abilities, legal and compliance controls and other corporate support systems will be adequate to manage our business and growth. The ineffectiveness of any of these controls or systems could adversely affect our business and prospects. In addition, if we acquire new businesses and introduce new products, we face numerous risks and uncertainties integrating their controls and systems, 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.
Certain business initiatives, including expansions of existing businesses, may bring us into contact directly or indirectly, with individuals and entities that are not within our traditional client and counterparty base and may expose us to new asset classes and new markets. These business activities expose us to new and enhanced risks, greater regulatory scrutiny of these activities, increased

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credit-related, sovereign and operational risks, and reputational concerns regarding the manner in which these assets are being operated or held.
Our business, financial condition and results of operations are dependent upon those of our individual businesses, and our aggregate investments in particular industries. We are a holding company with investments in businesses and assets in a number of industries. Jefferies Group is our largest investment and we have significant additional investments in the financial services industry.  Our business, financial condition and results of operations are dependent upon our various businesses and investments. Any material adverse change in one of our businesses or investments, or in a particular industry in which we operate or invest, may cause material adverse changes to our business, financial condition and results of operations. The more capital we devote to a particular investment or industry may increase the risk that such investment could significantly impact our financial condition and results of operations, possibly in a material adverse way.
Conditions in the financial markets and the economy may adversely impact our businesses and investments. These include economic conditions that may be specific to the industries in which our businesses and investments operate, as well as a general economic slowdown, prolonged recession or other market downturn or disruption. Adverse impacts may include the following:
A market downturn could lead to a decline in client and customer activity levels, and therefore a decline in services provided, causing reduced revenues from fees, commissions, spreads and other forms of revenue.
Adverse changes in the market could lead to decreases in the value of our holdings, both realized and unrealized.
Adverse changes in the market could also lead to a reduction in revenues from asset management fees and investment income from managed funds. The build out of our asset management business could also be impacted as adverse conditions could lead to a decrease in new capital raised and may cause investors to withdraw their investments and commitments. Even in the absence of a market downturn, below-market investment performance by 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.
Limitations on the availability of credit, such as occurred during 2008, can affect the ability of our businesses and investments to borrow on a secured or unsecured basis, which may adversely affect liquidity and results of operations. Global market and economic conditions have been particularly disrupted and volatile in the last several years and may be in the future. Cost and availability of funding could be affected by illiquid credit markets and wider credit spreads.
Certain of our current and future businesses and investments may require additional third-party funding to succeed, such as venture capital funding, joint venture funding or other third-party capital. Failure to obtain such third-party funding may cause such business, investment or prospective investment to fail or progress slower than expected which could adversely affect its and our funding, liquidity, operations and profitability. In addition, such failure could also adversely affect our reputation which could adversely affect our business and future business prospects.
Additional changes in tax law could impact our ability to utilize our deferred tax assets, decrease current and anticipated cash flows, or prompt revisions to compensation arrangements.
Should one or more of the competitors of our businesses or investments fail, business prospects and revenue could be negatively impacted due to negative market sentiment causing customers to cease doing business with, and lenders to cease extending credit to, our businesses and investments, which could adversely affect our operations, funding and liquidity.
Unfavorable economic conditions could have an adverse effect on the demand for new loans and the servicing of loans originated by third parties, which would have an adverse impact on the operations and profitability of some of our financial services businesses and investments.
Unfavorable conditions or changes in general political, economic or market conditions could adversely impact our business and prospects. In particular, the increasing trend toward sovereign protectionism and deglobalization resulting from the current populist political movement has resulted or could result in decreases in free trade, erosion of traditional international coalitions, the imposition of sanctions and tariffs, governmental closures and no-confidence votes, domestic and international strife, and general market upheaval in response to such results, all of which could negatively impact our business and prospects.
We are exposed to market risk. We are, directly and indirectly, affected by changes in market conditions. Market risk generally represents the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions. For example, changes in interest rates could adversely affect our net interest spread, the difference between the yield we earn on our assets and the interest rate we pay for sources of funding, which, in turn, impacts our net interest revenue and earnings. Changes in interest rates could affect the interest earned on assets differently than interest paid on liabilities. In our brokerage operations, a rising interest rate environment generally results in our earning a larger net interest spread. Conversely, in those operations, a falling interest rate environment generally results in our earning a smaller net interest spread. If we are unable to effectively manage our interest rate risk, changes in interest rates could have a material adverse effect on our profitability.

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Market risk is inherent in the financial instruments associated with our operations and activities, including trading account assets and liabilities, loans, securities, short-term borrowings, corporate debt, and derivatives. Market conditions that change from time to time, thereby exposing us to market risk, include fluctuations in interest rates, equity prices, relative exchange rates, and price deterioration or changes in value due to changes in market perception or actual credit quality of an issuer.
In addition, disruptions in the liquidity or transparency of the financial markets may result in our inability to sell, syndicate, or realize the value of security positions, thereby leading to increased concentrations. The inability to reduce our positions in specific securities may not only increase the market and credit risks associated with such positions, but also increase the level of risk-weighted assets on our balance sheet, thereby increasing capital requirements, which could have an adverse effect on our business, results of operations, financial condition and liquidity.
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. We may incur trading losses relating to the purchase, sale or short sale of fixed income, high yield, international, convertible, and equity securities, loans and futures and commodities for our own account. In any period, we may experience losses on our positions as a result of price fluctuations, 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 certain of our investments are marked to market on a daily basis, any adverse price movement in these investments 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.
Damage to our reputation could damage our business. Maintaining our reputation is critical to our attracting and maintaining customers, investors and employees. If we fail to deal with, or appear to fail to deal with, various issues that may give rise to reputational risk, we could significantly harm our business prospects. These issues include, but are not limited to, any of the risks discussed in this Item 1A, appropriately dealing with potential conflicts of interest, legal and regulatory requirements, ethical issues, money-laundering, cybersecurity and privacy, record keeping, sales and trading practices, failure to sell securities we have underwritten at the anticipated price levels, and the proper identification of the legal, reputational, credit, liquidity and market risks inherent in our products. A failure to deliver appropriate standards of service and quality, or a failure or perceived failure to treat customers and clients fairly, can result in customer dissatisfaction, litigation and heightened regulatory scrutiny, all of which can lead to lost revenue, higher operating costs and harm to our reputation. Further, negative publicity regarding us, whether or not true, may also result in harm to our prospects. Our operations in the past have been impacted as some clients either ceased doing business or temporarily slowed down the level of business they do, thereby decreasing our revenue. There is no assurance that we will be able to successfully reverse the negative impact of allegations and rumors in the future and our potential failure to do so could have a material adverse effect on our business, financial condition and liquidity.
We may incur losses if our risk management is not effective. We seek to monitor and control our risk exposure. Our risk management processes and procedures are designed to limit our and certain of our subsidiaries' exposure to acceptable levels as we conduct our businesses. We and certain of our subsidiaries apply comprehensive frameworks of limits on a variety of key metrics to constrain the risk profile of our business activities. The size of the limits reflects risk tolerance for certain activities. The frameworks may include inventory position and exposure limits on a gross and net basis, scenario analysis and stress tests, value-at-risk, sensitivities, exposure concentrations, aged inventory, amount of Level 3 assets, counterparty exposure, leverage, cash capital, and performance analysis. While we and certain of our subsidiaries employ various risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application, including risk tolerance determinations, cannot anticipate every economic and financial outcome or the specifics and timing of such outcomes. As a result, we may incur losses notwithstanding our risk management processes and procedures.
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.
Certain of our financial and other data processing systems rely on access to and the functionality of operating systems maintained by third parties. If the accounting, trading or other data processing systems on which we are dependent are unable to meet

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increasingly demanding standards for processing and security or, if they fail or have other significant shortcomings, we could be adversely affected. Such consequences may include our inability to effect transactions and manage our exposure to risk.
In addition, despite the contingency plans we and certain of our subsidiaries 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.
We rely on the security of our information technology systems and those of our third party providers to protect our proprietary information and information of our customers. Some of our businesses involve the storage and transmission of customers' personal and/or identifying information, consumer preferences and credit card information. While we believe that we have implemented protective measures to effectively secure information and prevent security breaches, and we continue to assess and improve these measures, our information technology systems have been and may continue to be vulnerable to unauthorized access, computer hacking, computer viruses or other unauthorized attempts by third parties to access the proprietary information of our customers. Information technology breaches and failures could disrupt our ability to function in the normal course of business resulting in lost revenue, the disclosure or modification of sensitive or confidential information and the incurrence of remediation and notification costs, resulting in legal and financial exposure. Moreover, loss of confidential customer identification information could harm our reputation and subject us to liability under laws that protect confidential personal data, resulting in increased costs or loss of revenues.
Our information and technology systems are critical components of our business and operations, and a failure of those systems or other aspects of our operations infrastructure may disrupt our business, cause financial loss, increase our legal liability and constrain our growth. Our operations rely extensively on the secure processing, storage and transmission of confidential financial, personal and other information in our computer systems and networks. Although we take protective measures and devote significant resources to maintaining and upgrading our systems and networks with measures such as intrusion and detection prevention systems, monitoring firewalls to safeguard critical business applications and supervising third party providers that have access to our systems, 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. Additionally, if a client's computer system, network or other technology is compromised by unauthorized access, we may face losses or other adverse consequences by unknowingly entering into unauthorized transactions. 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. Furthermore, such events may cause interruptions or malfunctions in our, our clients', our counterparties' or third parties' operations, including the transmission and execution of unauthorized transactions. 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 covered or not fully covered through our insurance. The increased use of smartphones, tablets and other mobile devices as well as cloud computing may also heighten these and other operational risks. Similar to other firms, we and our third party providers continue to be the subject of attempted unauthorized access, computer viruses and malware, and cyber attacks designed to disrupt or degrade service or cause other damage and denial of service. Additional challenges are posed by external parties, including foreign state actors. There can be no assurance that such unauthorized access or cyber incidents will not occur in the future, and they could occur more frequently and on a larger scale.
We are also subject to laws and regulations relating to the privacy of the information of our clients, employees or others, and any failure to comply with these regulations could expose us to liability and/or reputational damage. In addition, our businesses are increasingly subject to laws and regulations relating to surveillance, encryption and data on-shoring in the jurisdictions in which we operate. Compliance with these laws and regulations may require us to change our policies, procedures and technology for information security, which could, among other things, make us more vulnerable to cyber attacks and misappropriation, corruption or loss of information or technology.
Any cyber attack or other security breach of our technology systems, or those of our clients or other third-party vendors we rely on, could subject us to significant liability and harm our reputation. Our operations rely heavily on the secure processing, storage and transmission of sensitive and confidential financial, personal and other information in our computer systems and networks. There have been several highly publicized cases involving financial services companies reporting the unauthorized disclosure of client or other confidential information in recent years, as well as cyber attacks involving theft, dissemination and destruction of corporate information or other assets, in some cases as a result of failure to follow procedures by employees or contractors or as a result of actions by third parties. Like other financial services firms, we have been the target of attempted cyber attacks. Cyber attacks can originate from a variety of sources, including third parties affiliated with foreign governments, organized crime or terrorist organizations. Third parties may also attempt to place individuals within our firm or induce employees, clients or other users of our systems to disclose sensitive information or provide access to our data, and these types of risks may be difficult to detect or prevent. Although cybersecurity incidents among financial services firms are on the rise, we are not aware of any

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material losses relating to cyber attacks or other information security breaches. However, the techniques used in these attacks are increasingly sophisticated, change frequently and are often not recognized until launched. Although we seek to maintain a robust suite of authentication and layered information security controls, these controls could fail to detect, mitigate or remediate these risks in a timely manner. Despite our implementation of protective measures and endeavoring to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to human error, natural disasters, power loss, spam attacks, unauthorized access, distributed denial of service attacks, computer viruses and other malicious code, and other events that could result in significant liability and damage to our reputation, and have an ongoing impact on the security and stability of our operations.

We also rely on numerous third-party service providers to conduct other aspects of our business operations, and we face similar risks relating to them. While we regularly conduct security assessments on these third-party vendors, we cannot be certain that their information security protocols are sufficient to withstand a cyber attack or other security breach. In addition, in order to access our products and services, our customers may use computers and other devices that are beyond our security control systems and processes.

Notwithstanding the precautions we take, if a cyber attack or other information security breach were to occur, this could jeopardize the information we confidentially maintain, or otherwise cause interruptions in our operations or those of our clients and counterparties, exposing us to liability. As attempted attacks continue to evolve in scope and sophistication, we may be required to expend substantial additional resources to modify or enhance our protective measures, to investigate and remediate vulnerabilities or other exposures or to communicate about cyber attacks to our customers. Though we have insurance against some cyber risks and attacks, we may be subject to litigation and financial losses that exceed our policy limits or are not covered under any of our current insurance policies. A technological breakdown could also interfere with our ability to comply with financial reporting and other regulatory requirements, exposing us to potential disciplinary action by regulators. Additionally, the SEC issued guidance in February 2018 stating that, as a public company, we are expected to have controls and procedures that relate to cybersecurity disclosure, and are required to disclose information relating to certain cyber attacks or other information security breaches in disclosures required to be made under the federal securities laws. Further, successful cyber attacks at other large financial institutions or other market participants, whether or not we are affected, could lead to a general loss of customer confidence in financial institutions that could negatively affect us, including harming the market perception of the effectiveness of our security measures or the financial system in general, which could result in a loss of business.

Further, in light of the high volume of transactions we process, the large number of our clients, partners and counterparties, and the increasing sophistication of malicious actors, a cyber attack could occur and persist for an extended period of time without detection. We expect that any investigation of a cyber attack would take substantial amounts of time, and that there may be extensive delays before we obtain full and reliable information. During such time we would not necessarily know the extent of the harm or how best to remediate it, and certain errors or actions could be repeated or compounded before they are discovered. All of which would further increase the costs and consequences of such an attack.

We may also be subject to liability under various data protection laws. In providing services to clients, we manage, utilize and store sensitive or confidential client or employee data, including personal data. As a result, we are subject to numerous laws and regulations designed to protect this information, such as U.S. federal, state and international laws governing the protection of personally identifiable information. These laws and regulations are increasing in complexity and number. If any person, including any of our associates, negligently disregards or intentionally breaches our established controls with respect to client or employee data, or otherwise mismanages or misappropriates such data, we could be subject to significant monetary damages, regulatory enforcement actions, fines and/or criminal prosecution. In addition, unauthorized disclosure of sensitive or confidential client or employee data, whether through system failure, employee negligence, fraud or misappropriation, could damage our reputation and cause us to lose clients and related revenue. Potential liability in the event of a security breach of client data could be significant. Depending on the circumstances giving rise to the breach, this liability may not be subject to a contractual limit or an exclusion of consequential or indirect damages.
Recent legislation and new and pending regulation may significantly affect Jefferies Group or our other businesses and investments.  In recent years, there has been significant legislation and increased regulation affecting the financial services industry. In addition, there has also been recent discussions of proposed legislative and regulatory changes that would also affect the financial services industry. These legislative and regulatory initiatives affect not only us (particularly Jefferies Group, Berkadia and FXCM) but also our competitors and certain of our clients and customers. These changes could have an effect on our revenue and profitability, 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 legislation and regulation will not eventually have an adverse effect on our business, results of operations, cash flows and financial condition.

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Extensive regulation of our businesses limits our activities, and, if we violate these regulations, we may be subject to significant penalties. The financial services industry is subject to extensive laws, rules and regulations in every country in which we operate. Firms that engage in trading, wealth and asset management and investment banking must comply with the laws, rules and regulations imposed by national and state governments and regulatory and self-regulatory bodies with jurisdiction over such activities. Such laws, rules and regulations cover all aspects of the financial services business, including, but not limited to, sales and trading methods, trade practices, use and safekeeping of customers' funds and securities, capital structure, anti-money laundering and anti-bribery and corruption efforts, recordkeeping and the conduct of directors, officers and employees.
Regulators supervise certain of our business activities to monitor our compliance with such laws, rules and regulations in the relevant jurisdiction. In addition, if there are instances in which our regulators question our compliance with laws, rules, and regulations, they may investigate the facts and circumstances to determine whether we have complied. At any moment in time, we may be subject to one or more such investigation or similar review. At this time, all such investigations and similar reviews are insignificant in scope and immaterial to us. However, there can be no assurance that, in the future, we will not violate such laws, rules, or regulations and such investigations and similar reviews will not result in adverse regulatory requirements, regulatory enforcement actions and/or fines.
Any violation of these laws, rules and regulations could subject us to one or more of the following events: civil and criminal liability; sanctions, which could include the revocation of registrations as registered financial service firms (including registered investment advisers and broker-dealers); the revocation of the licenses of our financial advisers; censures; fines; or a temporary suspension or permanent bar from conducting business. The occurrence of any of these events could have a material adverse effect on our business, financial condition and prospects.
Certain of our subsidiaries are subject to regulatory financial capital holding requirements, such as the Net Capital Rule, that could impact various capital allocation decisions or limit the operations of its broker-dealers. In particular, compliance with the Net Capital Rule may restrict a broker-dealers' ability to engage in capital-intensive activities such as underwriting and trading, and may also limit their ability to make loans, advances, dividends and other payments.
Additional legislation, changes in rules, changes in the interpretation or enforcement of existing laws and rules, conflicts and inconsistencies among rules and regulations, or the entering into businesses that subject us to new rules and regulations may directly affect our business, results of operations and financial condition. We continue to monitor the impact of new U.S. and international regulation on our businesses.
The United Kingdom's exit from the European Union could adversely affect our businesses and investments. The referendum held in the U.K. on June 23, 2016 resulted in a determination that the U.K. should exit the European Union. In March 2017, the U.K. government initiated the exit process under Article 50 of the Treaty of the EU, commencing a period of up to two years for the United Kingdom and the other EU member states to negotiate the terms of the withdrawal. The uncertainty surrounding the timing, terms and consequences of the U.K.'s exit could adversely impact customer and investor confidence, result in additional market volatility, and adversely affect Jefferies Group, FXCM, as well as certain of Spectrum's subsidiaries, particularly those with operations or customers in Europe.

Jefferies Group operates substantial parts of its EU businesses from entities based in the U.K. Upon the U.K. leaving the EU, the regulatory and legal environment that would then exist, and to which its U.K. operations would then be subject, will depend on, in certain respects, the nature of the arrangements the U.K. agreed with the EU and other trading partners. It is highly likely that changes to its legal entity structure and operations in Europe will be required as a result of these arrangements, which might result in a less efficient operating model across its European legal entities. Jefferies Group is in the process of finalizing plans to ensure its continued ability to operate in the U.K. and the EU beyond the expected exit date.
A credit rating agency downgrade could significantly impact our businesses. We and Jefferies Group have credit ratings issued by various credit rating agencies. Maintaining our credit ratings is important to our and Jefferies Group's business and financial condition.  We advised certain credit rating agencies that we would target specific concentration, leverage and liquidity principles, expressed in the form of certain ratios and percentages. A failure to meet these ratios and percentages could trigger a ratings downgrade. We and Jefferies Group intend to access capital markets and issue debt securities from time to time, and a ratings downgrade may decrease demand for such offered security. A decrease in demand would not only make a successful financing more difficult, but also increase our respective capital costs. Similarly, our and Jefferies Group's access to other forms of credit may be limited and our respective borrowing costs may increase if our or Jefferies Group's credit ratings are downgraded. A downgrade could also negatively impact our and Jefferies Group's outstanding debt prices and our stock price. In addition, in connection with certain over-the-counter derivative contract arrangements and certain other trading arrangements, a ratings downgrade could cause us or Jefferies Group to provide additional collateral to counterparties, exchanges and clearing organizations

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which would negatively impact our and Jefferies Group's liquidity and financial condition. There can be no assurance that our or Jefferies Group's credit ratings will not be downgraded.
In addition, if Berkadia does not maintain specified servicer ratings from the credit rating agencies, customers would have the right to terminate their mortgage servicing agreements. If mortgage servicing agreements were terminated as a result of a servicer ratings downgrade, we could lose a significant portion of the value of our equity investment.
Increased competition may adversely affect our revenues and profitability. Many aspects of our business are intensely competitive. We compete directly with a number of bank holding companies and commercial banks, broker-dealers, investment banking firms and other financial institutions. 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. 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 products and 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.
The ability to attract, develop and retain highly skilled and productive employees is critical to the success of our business. Our ability to develop and retain our clients depends on the reputation, judgment, business generation capabilities and skills of our professionals. To compete effectively, we must attract, retain and motivate qualified professionals, including successful financial advisers, investment bankers, trading professionals, portfolio managers and other revenue producing or specialized personnel. Competitive pressures we experience with respect to employees could have an adverse effect on our business, results of operations, financial condition and liquidity.
Turnover in the financial services industry is high. The cost of retaining skilled professionals in the financial services industry has escalated considerably. Financial industry employers are increasingly offering guaranteed contracts, upfront payments, and increased compensation. These can be important factors in a current employee's decision to leave us as well as in a prospective employee's decision to join us. As competition for skilled professionals in the industry remains intense, we may have to devote significant resources to attracting and retaining qualified personnel.
If we were to lose the services of certain of our professionals, we may not be able to retain valuable relationships and some of our clients could choose to use the services of a competitor instead of our services. If we are unable to retain our professionals or recruit additional professionals, our reputation, business, results of operations and financial condition will be adversely affected. Further, new business initiatives and efforts to expand existing businesses frequently require that we incur compensation and benefits expense before generating additional revenues.
Moreover, companies in our industries whose employees accept positions with competitors often claim that those competitors have engaged in unfair hiring practices. We may be subject to such claims in the future as we seek to hire qualified personnel who have worked for our competitors. Some of these claims may result in material litigation. We could incur substantial costs in defending against these claims, regardless of their merits. Such claims could also discourage potential employees who work for our competitors from joining us.
We could experience significant increases in operating costs and reduced profitability due to competition for skilled management and staff employees in our operating businesses. We compete with many other entities for skilled management and staff employees, including entities that operate in different market sectors than us. Costs to recruit and retain adequate personnel could adversely affect results of operations.
Legal liability may harm our business. Many aspects of our businesses 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. The expansion of our businesses, including expansions into new products or markets, impose greater risks of liability. In addition, unauthorized or illegal acts of our employees could result in substantial liability. Substantial legal liability could have a material adverse financial effect or cause us significant reputational harm, which in turn could seriously harm our businesses and our prospects. Although our current assessment is that, other than as disclosed in this report, there is no pending litigation that could have a significant adverse impact, if our assessment proves to be in error, then the outcome of litigation could have a significant impact on our financial statements.
We may not be able to insure certain risks economically. We cannot be certain that we will be able to insure all risks that we desire to insure economically or that all of our insurers or reinsurers will be financially viable if we make a claim. If an uninsured

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loss or a loss in excess of insured limits should occur, or if we are required to pay a deductible for an insured loss, results of operations could be adversely affected.
Recent U.S. tax legislation may have a material adverse effect on our financial condition, results of operations and cash flows. On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was enacted. This legislation has made significant changes to the U.S. Internal Revenue Code, including the taxation of U.S. corporations by, among other things, limiting interest deductions, limiting deductibility of certain executive compensation, reducing the U.S. corporate income tax rate, disallowing certain deductions that had previously been allowed, altering the expensing of capital expenditures, adopting elements of a territorial tax system, assessing a repatriation tax or "transition tax" on undistributed earnings and profits of U.S. owned foreign corporations, and introducing certain anti-base erosion provisions. The legislation is highly complex and remains unclear in certain respects and will require final interpretations and regulations by the Internal Revenue Service and state tax authorities. Additionally, the legislation could be subject to potential amendments and technical corrections, any of which could lessen or increase certain adverse impacts of the legislation. Thus, the impact of certain aspects of the legislation on us remains unclear and could have an adverse impact on our financial condition, results of operations and cash flows.
We may not be able to generate sufficient taxable income to fully realize our deferred tax asset. At November 30, 2018, we have recognized net deferred tax assets of $512.8 million.  If we are unable to generate sufficient taxable income, we will not be able to fully realize the recorded amount of the net deferred tax asset. If we are unable to generate sufficient taxable income prior to the expiration of our federal income tax net operating loss carryforwards ("NOLs"), all or a portion of the NOLs would expire unused. Our projections of future taxable income required to fully realize the recorded amount of the net deferred tax asset reflect numerous assumptions about our operating businesses and investments, and are subject to change as conditions change specific to our business units, investments or general economic conditions. Changes that are adverse to us could result in the need to increase the deferred tax asset valuation allowance resulting in a charge to results of operations and a decrease to total shareholders' equity.
If our tax filing positions were to be challenged by federal, state and local or foreign tax jurisdictions, we may not be wholly successful in defending our tax filing positions. We record reserves for unrecognized tax benefits based on our assessment of the probability of successfully sustaining tax filing positions. Management exercises significant judgment when assessing the probability of successfully sustaining tax filing positions, and in determining whether a contingent tax liability should be recorded and, if so, estimating the amount. If our tax filing positions are successfully challenged, payments could be required that are in excess of reserved amounts or we may be required to reduce the carrying amount of our net deferred tax asset, either of which result could be significant to our financial condition or results of operations.
From time to time we may invest in illiquid securities that are subject to standstill agreements or are otherwise restricted. From time to time we may invest in securities that are subject to restrictions which prohibit us from selling the subject securities for a period of time. Such agreements may limit our ability to generate liquidity quickly through the disposition of the underlying investment while the agreement is effective.
Our common shares are subject to transfer restrictions. We and certain of our subsidiaries have significant NOLs and other tax attributes, the amount and availability of which are subject to certain qualifications, limitations and uncertainties.  In order to reduce the possibility that certain changes in ownership could result in limitations on the use of the tax attributes, our certificate of incorporation contains provisions that generally restrict the ability of a person or entity from acquiring ownership (including through attribution under the tax law) of 5% or more of our common shares and the ability of persons or entities now owning 5% or more of our common shares from acquiring additional common shares.  The restriction will remain until the earliest of (a) December 31, 2024, (b) the repeal of Section 382 of the Internal Revenue Code (or any comparable successor provision) and (c) the beginning of a taxable year to which these tax benefits may no longer be carried forward. The restriction may be waived by our Board of Directors on a case by case basis. Shareholders are advised to carefully monitor their ownership of our common shares and consult their own legal advisers and/or us to determine whether their ownership of our common shares approaches the proscribed level.
Jefferies Group's business is subject to significant credit risk. In the normal course of Jefferies Group's businesses, Jefferies Group is 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, Jefferies Group still faces the risks associated with changes in the market value of the collateral through settlement date or during the time when margin is extended and collateral has not been secured or the counterparty defaults before collateral or margin can be adjusted. Jefferies Group may also incur credit risk in its derivative transactions to the extent such transactions result in uncollateralized credit exposure to counterparties.

16


Jefferies Group seeks to control the risk associated with these transactions by establishing and monitoring credit limits and by monitoring collateral and transaction levels daily. Jefferies Group may require counterparties to deposit additional collateral or return collateral pledged. In certain circumstances, Jefferies Group may, under industry regulations, purchase the underlying securities in the market and seek reimbursement for any losses from the counterparty. However, there can be no assurances that Jefferies Group's risk controls will be successful.
Our investment in Berkadia may not prove to be successful and may adversely affect our results of operations or financial condition. As of November 30, 2018, we had an approximately $245 million investment in Berkadia. Many factors, most of which are outside of our control, can affect Berkadia's business, including loan losses in excess of reserves, a change in the relationships with U.S. Government-Sponsored Enterprises or federal agencies, a significant loss of customers, and other factors that directly and indirectly effect the results of operations, including the sales and profitability of Berkadia, and consequently may adversely affect our results of operations or financial condition.
If Berkadia suffered significant losses and was unable to repay its commercial paper borrowings, we would be exposed to loss pursuant to a reimbursement obligation to Berkshire Hathaway. Berkadia obtains funds generated by commercial paper sales of an affiliate of Berkadia. All of the proceeds from the commercial paper sales are used by Berkadia to fund new mortgage loans, servicer advances, investments and other working capital requirements. Repayment of the commercial paper is supported by a $1.5 billion surety policy issued by a Berkshire Hathaway insurance subsidiary and a Berkshire Hathaway corporate guaranty, and we have agreed to reimburse Berkshire Hathaway for one-half of any losses incurred thereunder. If Berkadia suffers significant losses and is unable to repay its commercial paper borrowings, we would suffer losses to the extent of our reimbursement obligation to Berkshire Hathaway. As of November 30, 2018, the aggregate amount of commercial paper outstanding was $1.47 billion.
Our semi-annual estimates of the fair values of holdings of certain of our merchant banking investments may differ from what can be realized and how these investments are reflected in our financial statements prepared in accordance with GAAP. During our October 2018 Investor Meeting and our January 10, 2019 letter to shareholders, we disclosed certain estimated fair values of our merchant banking investments and disclosed our intention to provide semi-annual disclosures relating to the estimated fair value of our holdings of certain merchant banking investments, some of which are consolidated. These semi-annual estimates may differ from how these investments are reflected in our financial statements prepared in accordance with GAAP. Factors to consider in connection with reviewing these semi-annual estimates of fair value include, but are not limited to, the following:

These estimates are forward-looking statements and should be read in connection with our Cautionary Statement for Forward-Looking Information.
Although we believe these estimates to be fair and reasonable, these semi-annual estimates may differ materially from realized values or future estimates.
Our semi-annual fair values are, indeed, estimates only and are subject to change.
We may determine to change the timing of providing these semi-annual estimates or stop providing such estimates at any time and for any reason.
Management does not necessarily use these estimates in making business decisions regarding the operation of our business or any decision relating to these investments.
These estimates may constitute non-GAAP financial measures and should be read in connection with disclosures relating to our use of non-GAAP financial measures.
Our investment in National Beef may not prove to be successful and may adversely affect our results of operations or financial condition. As of November 30, 2018, we had an approximately $654 million investment in National Beef. Many factors, most of which are outside of our control, can affect the prices and availability of key raw materials, beef processing and manufacturing operations, labor relations, demand for the products offered, sales volume and prices, regulatory compliance, legal liability, reputational issues concerning National Beef and/or its products, national and international politics and other factors that directly and indirectly effect the results of operations, including the sales and profitability of National Beef and consequently may adversely affect our results of operations. 
The performance of our oil and gas production and development investments, Vitesse Energy Finance and JETX Energy, is impacted by uncertainties specific to the oil and gas industry which we cannot control and may adversely affect our results of operations or financial condition. As of November 30, 2018, we had an approximately $641 million investment in Vitesse Energy Finance and JETX Energy. The oil and gas industry, by its nature, involves a high degree of risk. The value of these investments may be impacted by changes in the prices of oil, gas and natural gas liquids, which are affected by local, regional and global events or conditions that affect supply and demand and which have a history of significant price volatility. These investments are also exposed to changes in regulations affecting the industry, which could increase our cost of compliance, increase taxes or reduce or delay business opportunities. In addition, there are numerous uncertainties inherent in the estimation of future oil and gas production

17


and future income streams associated with production. As a result, actual results could materially differ from those we currently anticipate and our ability to profitably grow these investments could be adversely affected.
Our investment in WeWork may not prove to be successful and may adversely affect our results of operations or financial condition. As of November 30, 2018, we had an approximately $254 million investment in WeWork. Many factors, most of which are outside of our control, can affect WeWork's business, including the expansion of its business, number of customers and other factors that directly and indirectly effect the results of operations, including the sales and profitability of WeWork, and consequently may adversely affect our results of operations or financial condition.
Our investment in Spectrum Brands may not prove to be successful and may adversely affect our results of operations or financial condition. As of November 30, 2018, we had an approximately $374 million investment in Spectrum Brands. Many factors, most of which are outside of our control, can affect the results of operations, including the sales and profitability of Spectrum Brands which can lead to changes in the market price of Spectrum Brand's shares. Adverse changes in the market price of Spectrum Brand's shares may adversely affect our results of operations or financial condition. For additional risk factors concerning Spectrum Brands, see its SEC filings.
Our investment in HomeFed may not prove to be successful and may adversely affect our results of operations or financial condition. As of November 30, 2018, we had an approximately $338 million investment in HomeFed. Many factors, most of which are outside of our control, can affect HomeFed's business, including the state of the housing market in general and other factors that directly or indirectly effect the results of operations, including the sales and profitability of HomeFed, and consequently may adversely affect our results of operations or financial condition. For additional risk factors concerning HomeFed, see its SEC filings.

Our investment in Linkem may not prove to be successful and may adversely affect our results of operations or financial condition. As of November 30, 2018, we had an approximately $165 million investment in Linkem. Many factors, most of which are outside of our control, can affect Linkem's business, including the state of the Italian economy and capital markets in general, competition in the Italian telecommunications markets and other factors that directly and indirectly effect the results of operations, including the sales and profitability of Linkem, and consequently may adversely affect our results of operations or financial condition.

Our investment in FXCM may not prove to be successful and may adversely affect our results of operations or financial condition. As of November 30, 2018, we had an approximately $148 million investment in FXCM. Many factors, most of which are outside of our control, can affect FXCM's business, including the state of international market and economic conditions which impact trading volume and currency volatility, changes in regulatory requirements and other factors that directly or indirectly effect the results of operations, including the sales and profitability of FXCM, and consequently may adversely affect our results of operations or financial condition.
Our investment in Idaho Timber may not prove to be successful and may adversely affect our results of operations or financial condition. As of November 30, 2018, we had an approximately $78 million investment in Idaho Timber. Many factors, most of which are outside of our control, can affect Idaho Timber's business, including demand for its products, prices and availability of raw materials and other factors that directly and indirectly effect the results operations, including the sales and profitability of Idaho Timber, and consequently may adversely affect our results of operations or financial condition.





18


Item 1B.
Unresolved Staff Comments.
Not applicable.

Item 2.
Properties.
Our and Jefferies Group's global executive offices and principal administrative offices are located at 520 Madison Avenue, New York, New York under an operating lease arrangement. 
Jefferies Group maintains additional offices in over 30 cities throughout the world including its European headquarters in London and its Asian headquarters in Hong Kong. In addition, Jefferies Group maintains backup data center facilities with redundant technologies for each of its three main data center hubs in Jersey City, London and Hong Kong. Jefferies Group leases all of its office space, or contract via service arrangement, which management believes is adequate for its business.
Idaho Timber's plants, which are the principal properties used in its business, are described in Item 1 of this report.
Our businesses lease numerous other manufacturing, warehousing, office and headquarters facilities. The facilities vary in size and have leases expiring at various times, subject, in certain instances, to renewal options. See Note 24 to our consolidated financial statements.
Item 3.
Legal Proceedings.
The information required by this Item 3 is incorporated by reference from the "Contingencies" section in Note 24 in the Notes to consolidated financial statements in Item 8 of Part II of this report, which is incorporated herein by reference.
Item 4.
Mine Safety Disclosures.
Not applicable.

19


PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common shares are traded on the NYSE under the symbol JEF. As of January 18, 2019, there were approximately 1,455 record holders of the common shares.

We paid quarterly cash dividends of $0.125 per share for the last two quarters of 2018 and $0.10 per share for each of the first two quarters of 2018. We paid quarterly cash dividends of $0.10 per share for the each of the last two quarters of 2017 and $0.0625 per share for each of the first two quarters of 2017 and each quarter of 2016. We have indicated our intention to pay quarterly dividends currently at the annual rate of $0.50 per common share. The payment of dividends in the future is subject to the discretion of the Board of Directors and will depend upon general business conditions, legal and contractual restrictions on the payment of dividends and other factors that the Board of Directors may deem to be relevant.
Certain of our subsidiaries have significant NOLs and other tax attributes, the amount and availability of which are subject to certain qualifications, limitations and uncertainties. In order to reduce the possibility that certain changes in ownership could result in limitations on the use of our tax attributes, our certificate of incorporation contains provisions which generally restrict the ability of a person or entity from acquiring ownership (including through attribution under the tax law) of 5% or more of the common shares and the ability of persons or entities now owning 5% or more of the common shares from acquiring additional common shares.  The restrictions will remain in effect until the earliest of (a) December 31, 2024, (b) the repeal of Section 382 of the Internal Revenue Code (or any comparable successor provision) or (c) the beginning of a taxable year to which these tax benefits may no longer be carried forward.
In April 2018, the Board of Directors approved an increase to our existing share repurchase program, bringing total common shares authorized for repurchase to 25,000,000. In July 2018, the Board of Directors approved another increase to our share repurchase program, authorizing the repurchase of an additional 25,000,000 common shares. During the eleven months ended November 30, 2018, we repurchased a total of 50,000,000 shares pursuant to this program. Separately, during the eleven months ended November 30, 2018, we repurchased an aggregate of 222,857 shares in connection with our share compensation plans which allow participants to use shares to satisfy certain tax liabilities arising from the vesting of restricted shares and the distribution of restricted share units. The total number of shares purchased does not include unvested shares forfeited back to us pursuant to the terms of our share compensation plans. In January 2019, the Board of Directors approved an additional $500.0 million share repurchase authorization.
There were no unregistered sales of equity securities during the period covered by this report.
The following table presents information on our purchases of our common shares during the two months ended November 30, 2018:
 
Total
Number of
Shares
Purchased (1)
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
 
Maximum Number
of Shares that May Yet
Be Purchased Under the
Plans or Programs
 
 
 
 
 
 
 
 
October 1, 2018 - October 31, 2018
11,759,622

 
$
21.31

 
11,733,767

 
12,146,750

November 1, 2018 - November 30, 2018 (2)
12,146,750

 
$
21.57

 
12,146,750

 

Total
23,906,372

 
 

 
23,880,517

 
 


(1)
Includes an aggregate 25,855 shares repurchased other than as part of our publicly announced Board authorized repurchase program. We repurchased these securities in connection with our share compensation plans which allow participants to use shares to satisfy certain tax liabilities arising from the vesting of restricted shares and the distribution of restricted share units. The total number of shares purchased does not include unvested shares forfeited back to us pursuant to the terms of our share compensation plans.
(2)
Includes 801,654 shares that settled in December 2018.


20


Stockholder Return Performance Graph
Set forth below is a graph comparing the cumulative total stockholder return on our common shares against the cumulative total return of the Standard & Poor's 500 Stock Index and the Standard & Poor's 500 Financials Index for the period commencing December 31, 2013 to November 30, 2018. Index data was furnished by Standard & Poor's Capital IQ. The graph assumes that $100 was invested on December 31, 2013 in each of our common stock, the S&P 500 Index and the S&P 500 Financials Index and that all dividends were reinvested.
396517751_chartbig.jpg

21


Item 6.
Selected Financial Data.
The following selected financial data have been summarized from our consolidated financial statements. They should be read in conjunction with our consolidated financial statements and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations of this report.
 
Eleven Months Ended November 30, 2018
 
Twelve Months Ended December 31,
 
 
2017
 
2016
 
2015
 
2014
 
(In thousands, except per share amounts)
Selected Statements of Operations Data (a)
 
 
 
 
 
 
 
 
 
Net revenues
$
3,764,034

 
$
4,077,445

 
$
3,035,374

 
$
3,484,039

 
$
3,654,061

Total expenses
3,524,957

 
3,396,042

 
3,202,564

 
3,113,869

 
3,371,063

Income (loss) related to associated companies
57,023

 
(74,901
)
 
154,598

 
110,281

 
138,527

Income (loss) from continuing operations before income taxes
296,100

 
606,502

 
(12,592
)
 
480,451

 
421,525

Income tax provision
19,008

 
642,286

 
25,773

 
142,744

 
177,636

Income (loss) from continuing operations
277,092

 
(35,784
)
 
(38,365
)
 
337,707

 
243,889

Income (loss) from discontinued operations, including gain (loss) on disposal, net of taxes
773,984

 
288,631

 
232,686

 
(85,596
)
 
(44,864
)
Net (income) loss attributable to the redeemable noncontrolling interests
(37,263
)
 
(84,576
)
 
(65,746
)
 
26,543

 
8,616

Net income attributable to Jefferies Financial Group common shareholders
1,022,318

 
167,351

 
125,938

 
279,587

 
204,306

Per share:
 

 
 

 
 

 
 

 
 

Basic earnings (loss) per common share attributable to Jefferies Financial Group common shareholders:
 

 
 

 
 

 
 

 
 

Income (loss) from continuing operations
$
0.82

 
$
(0.10
)
 
$
(0.10
)
 
$
0.90

 
$
0.63

Income (loss) from discontinued operations, including gain (loss) on disposal
2.11

 
0.55

 
0.44

 
(0.16
)
 
(0.09
)
Net income
$
2.93

 
$
0.45

 
$
0.34

 
$
0.74

 
$
0.54

Diluted earnings (loss) per common share attributable to Jefferies Financial Group common shareholders:
 

 
 

 
 

 
 

 
 

Income (loss) from continuing operations
$
0.81

 
$
(0.10
)
 
$
(0.10
)
 
$
0.90

 
$
0.63

Income (loss) from discontinued operations, including gain (loss) on disposal
2.09

 
0.55

 
0.44

 
(0.16
)
 
(0.09
)
Net income
$
2.90

 
$
0.45

 
$
0.34

 
$
0.74

 
$
0.54


(a)
Prior to the fourth quarter of 2018, because our fiscal year end was December 31, we reflected Jefferies Group in our consolidated financial statements utilizing a one month lag. In connection with our change in fiscal year end to November 30, we eliminated the one month lag utilized to reflect Jefferies Group results beginning with the fourth quarter of 2018. Therefore, our results for the eleven months ended November 30, 2018, include twelve month results for Jefferies Group and eleven months for the remainder of our results.



22


 
At November 30, 2018
 
At December 31,
 
 
2017
 
2016
 
2015
 
2014
 
(In thousands, except per share amounts)
Selected Statements of Financial Condition Data
 
 
 
 
 
 
 
 
 
Total assets
$
47,131,095

 
$
47,169,108

 
$
45,071,307

 
$
46,331,184

 
$
52,614,324

Long-term debt
7,617,563

 
7,885,783

 
7,380,443

 
7,400,582

 
8,519,584

Mezzanine equity
144,779

 
551,593

 
461,809

 
316,633

 
311,686

Shareholders' equity
10,060,866

 
10,105,957

 
10,128,100

 
10,401,211

 
10,302,158

Book value per common share
$
32.72

 
$
28.37

 
$
28.18

 
$
28.68

 
$
28.03

Cash dividends per common share
$
0.45

 
$
0.325

 
$
0.25

 
$
0.25

 
$
0.25


Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
The purpose of this section is to discuss and analyze our consolidated financial condition, liquidity and capital resources and results of operations. This analysis should be read in conjunction with the consolidated financial statements and related footnote disclosures contained in this report and the following "Cautionary Statement for Forward-Looking Information."
Cautionary Statement for Forward-Looking Information
Statements included in this report may contain forward-looking statements. Such statements may relate, but are not limited, to projections of revenues, income or loss, development expenditures, plans for growth and future operations, competition and regulation, as well as assumptions relating to the foregoing. Such forward-looking statements are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted or quantified. When used in this report, the words "will," "could," "estimates," "expects," "anticipates," "believes," "plans," "intends" and variations of such words and similar expressions are intended to identify forward-looking statements that involve risks and uncertainties.  Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements.
Factors that could cause actual results to differ materially from any results projected, forecasted, estimated or budgeted or may materially and adversely affect our actual results include, but are not limited to, those set forth in Item 1A. Risk Factors and elsewhere in this report and in our other public filings with the SEC.
Undue reliance should not be placed on these forward-looking statements, which are applicable only as of the date hereof. Except as may be required by law, we undertake no obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report or to reflect the occurrence of unanticipated events.
Results of Operations
We are a diversified financial services company engaged in investment banking and capital markets, asset management and direct investing. Jefferies Group, our largest subsidiary, is the largest independent full-service global investment banking firm headquartered in the U.S.

In the fourth quarter of 2018, we changed our fiscal year end from a calendar year basis to a fiscal year ending on November 30. Our 2018 fiscal year consists of the eleven month transition period beginning January 1, 2018 through November 30, 2018. Financial statements for 2017 and 2016 continue to be presented on the basis of our previous calendar year end. Jefferies Group has a November 30 year end. Prior to the fourth quarter of 2018, because our fiscal year end was December 31, we reflected Jefferies Group in our consolidated financial statements utilizing a one month lag. In connection with our change in fiscal year end to November 30, we eliminated the one month lag utilized to reflect Jefferies Group results beginning with the fourth quarter of 2018. Therefore, our results for the eleven months ended November 30, 2018, include twelve month results for Jefferies Group and eleven months for the remainder of our results.

23



During the second and third quarters of 2018, we closed three previously announced transactions that impacted our results for the eleven months ended November 30, 2018. These include the sale of 48% of National Beef in June 2018, reducing our ownership to 31%. We deconsolidated National Beef and are accounting for our remaining investment as an equity method investment within our Merchant Banking business. In August 2018, we sold 100% of our equity interest in Garcadia and our associated real estate. Vitesse Energy Finance also acquired a package of non-operated Bakken assets for $190.0 million in April 2018, of which approximately $144.0 million was funded as equity.

Our pre-tax income from continuing and discontinued operations was $1.3 billion for the eleven months ended November 30, 2018, significantly higher than $1.0 billion for the twelve months ended December 31, 2017. Income from continuing operations before income taxes was $296.1 million for the eleven months ended November 30, 2018 as compared to $606.5 million for the twelve months ended December 31, 2017.

Results for the eleven months ended November 30, 2018 include a pre-tax gain of $873.5 million, or $643.9 million net of tax expense, from the National Beef transaction. This gain is reflected in our results as a gain on disposal of discontinued operations. Our share of the results of National Beef prior to the transaction have also been reflected as discontinued operations, including prior year amounts. Results for the eleven months ended November 30, 2018 include the pre-tax gain of $221.7 million from the Garcadia transaction. The twelve months ended December 31, 2017 include a pre-tax gain on the sale of Conwed Plastics ("Conwed") of $178.2 million.

A number of other items also impacted comparability of 2018 with the prior year. Results for the eleven months ended November 30, 2018 includes a mark-to-market decrease in the value of our investment in Spectrum Brands of $418.8 million, a mark-to-market increase in the value of our investment in WeWork of $70.9 million, a $62.1 million impairment loss related to our investment in FXCM, a $47.9 million impairment loss related to Golden Queen Mining Company, LLC ("Golden Queen"), a net loss at LAM and continued strong performance by Berkadia. The twelve months ended December 31, 2017 includes a $130.2 million impairment loss related to FXCM and a mark-to-market increase in the value of our investment in HRG Group, Inc. ("HRG") of $64.8 million.

A summary of results of operations for the eleven months ended November 30, 2018 is as follows (in thousands):
 
Jefferies Group
 
Merchant Banking
 
Corporate
 
Parent Company Interest
 
Consolidation Adjustments
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Net revenues
$
3,183,376

 
$
571,831

 
$
22,300

 
$

 
$
(13,473
)
 
$
3,764,034

 
 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 

 
 
 
 
 
 
 
 
Compensation and benefits
1,736,264

 
77,169

 
50,222

 

 
(873
)
 
1,862,782

Cost of sales

 
307,071

 

 

 

 
307,071

Floor brokerage and clearing fees
189,068

 

 

 

 
(4,858
)
 
184,210

Interest

 
35,159

 

 
54,090

 

 
89,249

Depreciation and amortization
68,296

 
48,852

 
3,169

 

 

 
120,317

Selling, general and other expenses
780,081

 
150,115

 
35,049

 

 
(3,917
)
 
961,328

Total expenses
2,773,709

 
618,366

 
88,440

 
54,090

 
(9,648
)
 
3,524,957

Income (loss) from continuing operations before income taxes and income related to associated companies
409,667

 
(46,535
)
 
(66,140
)
 
(54,090
)
 
(3,825
)
 
239,077

Income related to associated companies

 
57,023

 

 

 

 
57,023

Income (loss) from continuing operations before income taxes
$
409,667

 
$
10,488

 
$
(66,140
)
 
$
(54,090
)
 
$
(3,825
)
 
296,100

Income tax provision from continuing operations
 
 
 
 
 
 
 
 
 
 
19,008

Income from discontinued operations, net of income tax provision
 
 
 
 
 
 
 
 
 
 
130,063

Gain on disposal of discontinued operations, net of income tax provision
 
 
 
 
 
 
 
 
 
 
643,921

Net income
 
 
 
 
 
 
 
 
 
 
$
1,051,076



24


A summary of results of operations for the twelve months ended December 31, 2017 is as follows (in thousands):
 
Jefferies Group
 
Merchant Banking
 
Corporate
 
Parent Company Interest
 
Consolidation Adjustments
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Net revenues
$
3,198,109

 
$
876,180

 
$
6,306

 
$

 
$
(3,150
)
 
$
4,077,445

 
 
 
 
 
 
 
 
 
 
 

Expenses:
 
 
 

 
 
 
 
 
 
 

Compensation and benefits
1,829,096

 
73,811

 
46,655

 

 
1,373

 
1,950,935

Cost of sales

 
280,952

 

 

 

 
280,952

Floor brokerage and clearing fees
179,478

 

 

 

 
(4,972
)
 
174,506

Interest

 
42,259

 

 
58,943

 

 
101,202

Depreciation and amortization
62,668

 
44,257

 
3,470

 

 

 
110,395

Selling, general and other expenses
621,943

 
131,627

 
34,983

 

 
(10,501
)
 
778,052

Total expenses
2,693,185


572,906


85,108


58,943

 
(14,100
)

3,396,042

Income (loss) from continuing operations before income taxes and loss related to associated companies
504,924


303,274


(78,802
)

(58,943
)
 
10,950


681,403

Loss related to associated companies

 
(74,901
)
 

 

 

 
(74,901
)
Income (loss) from continuing operations before income taxes
$
504,924


$
228,373


$
(78,802
)

$
(58,943
)
 
$
10,950


606,502

Income tax provision from continuing operations
 
 
 
 
 
 
 
 
 
 
642,286

Income from discontinued operations, net of income tax provision
 
 
 
 
 
 
 
 
 
 
288,631

Net income
 
 
 
 
 
 
 
 
 
 
$
252,847


A summary of results of operations for the twelve months ended December 31, 2016 is as follows (in thousands):
 
Jefferies Group
 
Merchant Banking
 
Corporate
 
Parent Company Interest
 
Consolidation Adjustments
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Net revenues
$
2,414,614

 
$
621,804

 
$
2,689

 
$

 
$
(3,733
)
 
$
3,035,374

 
 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 

 
 
 
 
 
 
 

Compensation and benefits
1,568,948

 
84,486

 
35,015

 

 
(124
)
 
1,688,325

Cost of sales

 
337,039

 

 

 

 
337,039

Floor brokerage and clearing fees
167,205

 

 

 

 

 
167,205

Interest

 
36,876

 

 
58,881

 

 
95,757

Depreciation and amortization
60,206

 
53,286

 
3,619

 

 

 
117,111

Selling, general and other expenses
588,283

 
179,527

 
36,399

 

 
(7,082
)
 
797,127

Total expenses
2,384,642

 
691,214

 
75,033

 
58,881

 
(7,206
)
 
3,202,564

Income (loss) from continuing operations before income taxes and income related to associated companies
29,972

 
(69,410
)
 
(72,344
)
 
(58,881
)
 
3,473

 
(167,190
)
Income related to associated companies

 
154,598

 

 

 

 
154,598

Income (loss) from continuing operations before income taxes
$
29,972

 
$
85,188

 
$
(72,344
)
 
$
(58,881
)
 
$
3,473

 
(12,592
)
Income tax provision from continuing operations
 
 
 
 
 
 
 
 
 
 
25,773

Income from discontinued operations, net of income tax provision
 
 
 
 
 
 
 
 
 
 
232,686

Net income
 
 
 
 
 
 
 
 
 
 
$
194,321


25


Jefferies Group
Jefferies Group was acquired on March 1, 2013 and is reflected in our 2017 and 2016 consolidated financial statements utilizing a one month lag; Jefferies Group's fiscal year ends on November 30th. Jefferies Group financial data is presented in each year based on the twelve months ended November 30. A summary of results of operations for Jefferies Group is as follows (in thousands):
 
2018
 
2017
 
2016
 
 
 
 
 
 
Net revenues
$
3,183,376

 
$
3,198,109

 
$
2,414,614

 
 
 
 
 
 
Expenses:
 

 
 

 
 

Compensation and benefits
1,736,264

 
1,829,096

 
1,568,948

Floor brokerage and clearing fees
189,068

 
179,478

 
167,205

Depreciation and amortization
68,296

 
62,668

 
60,206

Selling, general and other expenses
780,081

 
621,943

 
588,283

Total expenses
2,773,709

 
2,693,185

 
2,384,642

Income from continuing operations before income taxes
$
409,667

 
$
504,924

 
$
29,972


Jefferies Group comprises many business units, with many interactions and much integration among them. Business activities include the sales, trading, origination and advisory effort for various equity, fixed income, commodities, foreign exchange and advisory services. Jefferies Group's business, by its nature, does not produce predictable or necessarily recurring revenues or earnings. Jefferies Group's results in any given period can be materially affected by conditions in global financial markets, economic conditions generally, and its own activities and positions.

Revenues by Source

Net revenues presented for Jefferies Group's businesses include allocations of interest income and interest expense as it assesses the profitability of these businesses inclusive of the net interest revenue or expense associated with the respective activities, which is a function of the mix of each business's associated assets and liabilities and the related funding costs.

In connection with the adoption of the new revenue standard in the first quarter of 2018, Jefferies Group has made changes to the presentation of its "Revenues by Source" to better align the manner in which we describe and present the results of Jefferies Group's performance with the manner in which it manages its business activities and serves its clients. We believe that the reorganization of Jefferies Group's revenue reporting will enable us to describe the business mix more clearly and provide greater transparency in the communication of Jefferies Group's results. Additionally, the results of the investment banking business now include a new subcategory "Other investment banking", which contains Jefferies Group's share of net earnings from its corporate lending joint venture, Jefferies Finance, as well as any gains and losses from any securities or loans received or acquired in connection with its investment banking efforts. Previously reported results are presented on a comparable basis in the tables below.

The following is a description of the changes that have been made:
Equities revenues now represent the activities of Jefferies Group's core equities sales and trading, securities finance, prime brokerage and wealth management businesses. Revenues from other activities previously presented within the Equities business have been disaggregated as follows:
Jefferies Group's share of net earnings from its Jefferies Finance joint venture, as well as any revenues from securities and loans received or acquired in connection with its investment banking efforts, are now presented as part of Jefferies Group's investment banking business.
Jefferies Group's share of net earnings from its historic Jefferies LoanCore LLC ("Jefferies LoanCore") joint venture is presented as part of its fixed income business through its sale in October 2017.
Revenues related to Jefferies Group's principal investments in certain private equity funds and hedge funds managed by third parties or related parties, investments in strategic ventures (including KCG Holdings, Inc. ("KCG") through its sale in July 2017), certain other securities owned, and investments held as part of obligations under employee benefit plans, including deferred compensation arrangements, are now presented as part of its other business.
Revenue related to Jefferies Group's capital invested in asset management funds that are managed by Jefferies Group is now presented within Jefferies Group's asset management business.
Revenues from Jefferies Group's legacy futures business and revenues associated with structured notes issued by Jefferies Group are now presented as part of its other business. Additionally, revenues derived from securities or loans received or

26


acquired in connection with Jefferies Group's investment banking efforts are now presented as part of investment banking revenues.
Revenues from principal investments in certain private equity and asset management funds managed by related parties, which were previously presented within Jefferies Group's asset management revenue, are now presented as part of its other business.

The changes to the manner in which we describe and disclose the performance of Jefferies Group's business activities has no effect on its historical consolidated results of operation. The composition of Jefferies Group's net revenues has varied over time as financial markets and the scope of its operations have changed. The composition of net revenues can also vary from period to period due to fluctuations in economic and market conditions, and its own performance.

The following provides a summary of net revenues by source (in thousands):
 
2018
 
2017
 
2016
 
 
 
 
 
 
Equities
$
665,557

 
$
674,424

 
$
597,445

Fixed income
559,712

 
618,388

 
654,337

Total sales and trading
1,225,269

 
1,292,812

 
1,251,782

 
 

 
 

 
 

Equity
454,555

 
344,973

 
235,207

Debt
635,606

 
649,220

 
304,576

Capital markets
1,090,161

 
994,193

 
539,783

Advisory
820,042

 
770,092

 
654,190

Other investment banking
3,638

 
19,776

 
(108,487
)
Total investment banking
1,913,841

 
1,784,061

 
1,085,486

Other
45,316

 
92,987

 
999

Total capital markets
3,184,426

 
3,169,860

 
2,338,267

 
 
 
 
 
 
Asset management fees
21,214

 
19,224

 
23,711

Investment return
(22,264
)
 
9,025

 
52,636

Total asset management
(1,050
)
 
28,249

 
76,347

 
 
 
 
 
 
Total net revenues
$
3,183,376

 
$
3,198,109

 
$
2,414,614


Equities Net Revenues

Equities are comprised of net revenues from:
services provided to Jefferies Group's clients from which it earns commissions or spread revenue by executing, settling and clearing transactions for clients;
advisory services offered to clients;
financing, securities lending and other prime brokerage services offered to clients; and
wealth management services, which includes providing clients access to all of its institutional execution capabilities.

Total equities net revenues were $665.6 million for 2018, a decrease of $8.8 million, compared with $674.4 million for 2017. Equities posted record results in 2018 for Jefferies Group's overall global core sales and trading business and within the U.S., Europe and Asia Pacific regions. Jefferies Group's results include records for its electronic trading, equity derivatives and prime brokerage businesses. The increase in equities net revenues from its core equities sales and trading businesses was offset by losses in certain block positions in 2018 compared with gains in 2017.

The results in equities net revenues during 2018 reflect improved performance in various core global equities businesses, primarily driven by higher revenues in Jefferies Group's equity derivatives, electronic trading and prime brokerage businesses, primarily due to higher equity volatility, overall improved market trading volumes and an increase in its commissions. This was partially offset by a decrease in its U.S. and European cash equities, convertibles and securities finance businesses, primarily due to lower customer activity. European revenues were also lower as a result of the delay in advisory payments and the impact of unbundling due to the Market in Financial Instruments Directive ("MiFID II") regulation.

Equities net revenues were $674.4 million for 2017, an increase of $77.0 million compared with $597.4 million for 2016. Equities net revenues increased with higher revenues in Jefferies Group's electronic trading, prime brokerage services, and Asia Pacific cash equities businesses, primarily due to increased customer activity and increased trading volumes. The increase was partially offset by lower revenues in its equity derivatives and Europe cash equities businesses, primarily due to reduced market making activities

27


and lower equity volatility. In addition, results in 2017 included certain strategic investment gains compared with losses in 2016. Equities commission revenues declined in Jefferies Group's equity derivative and U.S. cash equities businesses due to reduced trading volumes and lower levels of volatility, partially offset by higher revenues in its electronic trading and Asia Pacific cash equities businesses due to increased trading volumes.
Fixed Income Net Revenues
Fixed income is comprised of net revenues from:
executing transactions for clients and making markets in securitized products, investment grade, high-yield, emerging markets, municipal and sovereign securities and bank loans;
foreign exchange execution on behalf of clients; and
interest rate derivatives and credit derivatives (used primarily for hedging activities).

Fixed income net revenues in 2017 and 2016 also included Jefferies Group's share of the net earnings from its joint venture investment in Jefferies LoanCore, which was accounted for under the equity method. On October 31, 2017, Jefferies Group sold all of its membership interests in Jefferies LoanCore for approximately $173.1 million, the estimated book value at October 31, 2017. In addition, Jefferies Group may be entitled to additional cash consideration over the next four years in the event Jefferies LoanCore's yearly return on equity exceeds certain thresholds.

Fixed income net revenues totaled $559.7 million for 2018, a decrease of $58.7 million compared with net revenues of $618.4 million in 2017, primarily due to difficult market conditions in Jefferies Group's global investment grade credit businesses predominately in the fourth quarter of 2018. Further, performance in the first quarter of 2017 was bolstered by robust trading activity following the 2016 U.S. Presidential election, which was not repeated in the current year.
Revenues in Jefferies Group's U.S. securitized markets group were significantly improved, primarily as its business continues to focus on the securitization of non-commoditized products. Revenues in Jefferies Group's leveraged credit business were strong as Jefferies Group enhanced its trading and coverage team across loans, bonds and distressed products, as well as increased results from secondary trading of floating rate loans, while balancing market risk. Revenues declined in Jefferies Group's global investment grade credit business as lack of volatility and higher interest rates reduced trading volumes resulting in increased competition chasing limited opportunities. During the fourth quarter, credit spreads widened and new issue activity slowed, further reducing client trading activity. Revenues in Jefferies Group's international securitized markets group were down due to limited market opportunities as the European Central Bank's quantitative easing program comes to an end.
Global rates revenues in 2018 declined due to uncertainty over Brexit and international economic concerns. In addition, the opportunities in the prior year, primarily in the first quarter of 2017, from volatility from the U.S. Presidential election and European election cycles were not replicated in the current year. Revenues in Jefferies Group's municipal trading business were lower on reduced market activity driven by changes in federal tax legislation and the backdrop of increased interest rates dampened investor interest. The business outperformed in the prior year, as macro events drove a more favorable trading environment. The prior year also included revenues from Jefferies Group's share of Jefferies LoanCore, which was sold in October 2017, as well as revenues from non-core fixed income products that have now been de-emphasized.
Fixed income net revenues were $618.4 million for 2017, a decrease of $35.9 million, compared with net revenues of $654.3 million in 2016. Jefferies Group recorded modestly lower revenues in 2017 as compared with 2016, primarily due to a more challenging trading environment across most products, including most credit and rates businesses. In 2017, volatility was dampened as quantitative easing continued across most markets Jefferies Group transacts in. This was partially offset by better risk management, addition of staff in certain businesses, and refreshed strategies in some businesses.
Net revenues in Jefferies Group's leveraged credit business in 2017 were higher due to increased trading activities in high yield and distressed products as a result of additions to staff and repositioned risk. This was compared to relatively significant mark-to-market losses recognized in the early part of 2016. Higher revenues in Jefferies Group's European credit and international securitized markets group businesses were due to repositioned strategies taking advantage of trading opportunities in certain industry sectors. This is compared to volatile oil prices and uncertainty as to bank liquidity in 2016, which negatively impacted revenues in this business in the prior year. Jefferies Group's municipal securities business performed well for the greater part of the year, driven by increased client activity as new team members were added and market share expanded. Performance for the municipal securities business was partially dampened at the end of the 2017 fiscal year as the municipal bond market dislocated over concerns around the potential impacts of pending U.S. tax reform on both municipal bond issuers and investors.
Revenues in Jefferies Group's corporates and emerging markets business declined in a maturing credit cycle as volatility and transaction spreads decreased from prior year levels, while demand for new issuances and higher yielding investments and higher levels of volatility were prevalent in 2016. Lower revenues in Jefferies Group's global rates and U.S. securitized markets group business were due to lower levels of volatility resulting in lower transaction based revenues. In the U.S. securitized markets businesses

28


this was partially offset by increased activity in origination businesses including collateralized loan obligations. Net revenues from Jefferies Group's share of Jefferies LoanCore, which was sold in October 2017, increased slightly during 2017 as compared to 2016 due to an increase in loan closings and syndications.
Investment Banking Revenues
Investment banking is comprised of revenues from:
capital markets services, which include underwriting and placement services related to corporate debt, municipal bonds, mortgage- and asset-backed securities and equity and equity-linked securities and loan syndication;
advisory services with respect to mergers and acquisitions and restructurings and recapitalizations;
Jefferies Group's share of net earnings from its corporate lending joint venture Jefferies Finance; and
securities and loans received or acquired in connection with Jefferies Group's investment banking activities.

Total investment banking revenues were $1,913.8 million for 2018, including an increase of $131.8 million in investment banking net revenues as a result of the new revenue standard. See Notes 2 and 4, in our consolidated financial statements included in this Annual Report on Form 10-K, for further details on the new revenue standard. Jefferies Group's results reflect continued strong performance in both its equity capital markets and advisory businesses, as Jefferies Group increased its fee market share in both businesses.

Other investment banking revenues were $3.6 million for 2018 compared with $19.8 million for 2017. The results reflect net revenues of $98.6 million and $90.8 million in 2018 and 2017, respectively, from Jefferies Group's share of the profits of the Jefferies Finance joint venture, which were offset by the amortization of costs and allocated interest expense related to Jefferies Group's investment in the Jefferies Finance business.

From equity and debt capital raising activities, Jefferies Group generated $454.6 million and $635.6 million in revenues, respectively, for 2018. During 2018, Jefferies Group completed 969 public and private debt financings that raised $270.1 billion in aggregate and Jefferies Group completed 193 public and private equity and convertible offerings that raised $43.3 billion (179 of which Jefferies Group acted as sole or joint bookrunner). Financial advisory revenues totaled $820.0 million, including revenues from 180 merger and acquisition transactions and 15 restructuring and recapitalization transactions with an aggregate transaction value of $193.9 billion.

Total investment banking revenues were a then record $1,784.1 million for 2017, 64.4% higher than 2016. This increase was due to strong performance across Jefferies Group's debt capital markets, equity capital markets and advisory businesses, supported by a strong overall capital raising and merger and acquisition environment. In 2016, new issue equity and leveraged finance capital markets were virtually closed throughout January and February and remained slow throughout 2016. Capital markets revenues in 2017 increased 84.2% from 2016. Advisory revenues for 2017 increased 17.7% compared to 2016. Other investment banking revenues were $19.8 million for 2017, compared with a loss of $108.5 million for 2016. The results reflect net revenues of $90.8 million and a net loss of $9.3 million in 2017 and 2016, respectively, from Jefferies Group's share of the profits of the Jefferies Finance joint venture, which were offset by the amortization of costs and allocated interest expense related to Jefferies Group's investment in the Jefferies Finance business.

From equity and debt capital raising activities during 2017, Jefferies Group generated $345.0 million and $649.2 million in revenues, respectively. During 2017, Jefferies Group completed 1,121 public and private debt financings that raised $292.1 billion in aggregate and Jefferies Group completed 173 public and private equity and convertible offerings that raised $59.7 billion (164 of which Jefferies Group acted as sole or joint bookrunner). Financial advisory revenues totaled $770.1 million, including revenues from 171 merger and acquisition transactions and ten restructuring and recapitalization transactions with an aggregate transaction value of $180.6 billion.

Investment banking revenues were $1,085.5 million for 2016. From equity and debt capital raising activities during 2016, Jefferies Group generated $235.2 million and $304.6 million in revenues, respectively. During 2016, Jefferies Group completed 892 public and private debt financings that raised $188.6 billion in aggregate and Jefferies Group completed 129 public and private equity and convertible offerings that raised $24.4 billion (125 of which Jefferies Group acted as sole or joint bookrunner). Financial advisory revenues totaled $654.2 million, including revenues from 161 merger and acquisition transactions and 18 restructuring and recapitalization transactions with an aggregate transaction value of $135.2 billion.


29


Other Net Revenues

Other net revenues are comprised of revenues from:
• strategic investments other than Jefferies Finance (such as KCG through its sale in July 2017);
• principal investments in private equity and hedge funds managed by third parties or related parties;
• investments held as part of employee benefit plans, including deferred compensation plans (for which Jefferies Group incurs corresponding compensation expenses); and
• Jefferies Group's legacy Futures business.

Other also includes Jefferies Group's share of the income from Berkadia for the months of October and November 2018. On October 1, 2018, Jefferies transferred to Jefferies Group its 50% interest in Berkadia.

Other net revenues totaled $45.3 million for 2018, a decrease of $47.7 million compared with $93.0 million for 2017. Results for 2017 included a net gain of $93.4 million from Jefferies Group's investment in KCG, which was sold in July 2017, partially offset by foreign currency gains. The results in 2018 include net revenues of $20.0 million due to Jefferies Group's share of income from Berkadia.

Other net revenues totaled $93.0 million for 2017, an increase of $92.0 million compared with $1.0 million for 2016. Results for 2017 included a net gain of $93.4 million from Jefferies Group's investment in KCG, which was sold in July 2017, compared with a net gain of $19.6 million for 2016.

Asset Management Net Revenues

Asset management revenues include the following:
• management and performance fees from funds and accounts managed by Jefferies Group; and
• investment income from capital invested in and managed by Jefferies Group's asset management business and other asset managers.

In the fourth quarter of 2018, Jefferies transferred to Jefferies Group capital investments in certain separately managed accounts and funds. Due to this transfer, Jefferies Group has made changes to the presentation of its "Revenues by Source" in the fourth quarter of 2018 and are including investment income from capital invested in these separately managed accounts and funds within asset management revenues. Previously reported results are presented on a comparable basis.
Asset management revenues were $(1.1) million for 2018, as compared with $28.2 million for 2017 and $76.3 million for 2016. The decline in asset management revenues from 2016 to 2017 and from 2017 to 2018 is primarily due to reduced returns on investments. The key components of asset management revenues are the level of assets under management and the performance return, whether on an absolute basis or relative to a benchmark or hurdle. These components can be affected by financial markets, profits and losses in the applicable investment portfolios and client capital activity. Further, asset management fees vary with the nature of investment management services. The terms under which clients may terminate Jefferies Group's investment management authority, and the requisite notice period for such termination, varies depending on the nature of the investment vehicle and the liquidity of the portfolio assets.
Compensation and Benefits
Compensation and benefits expense consists of salaries, benefits, commissions, annual cash compensation awards and the amortization of certain share-based and cash compensation awards to employees. Cash and historical share-based awards and a portion of cash awards granted to employees as part of year end compensation generally 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 (primarily non-compete clauses) of those awards. Accordingly, the compensation expense for a portion of awards granted at year end as part of annual compensation is recorded in the year of the award.
Included in Compensation and benefits expense are share-based amortization and cash-based expense for senior executive awards, non-annual share-based and cash-based awards to other employees and certain year end awards that contain future service requirements for vesting, all of which are being amortized over their respective future service periods. In addition, the senior executive awards contain market and performance conditions.

Compensation expense related to the amortization of share-based and cash-based awards amounted to $302.0 million, $278.2 million and $287.2 million for 2018, 2017 and 2016, respectively. Compensation and benefits as a percentage of Net revenues was 54.5%, 57.2% and 65.0% for 2018, 2017 and 2016, respectively.

30


Non-Compensation Expenses
Non-compensation expenses include floor brokerage and clearing fees, underwriting costs, technology and communications expense, occupancy and equipment rental expense, business development, professional services, bad debt provision, impairment charges, depreciation and amortization expense and other costs. All of these expenses, other than floor brokerage and clearing fees and depreciation and amortization expense, are included in Selling, general and other expenses in the Consolidated Statements of Operations.
The increase in non-compensation expenses during 2018 as compared to 2017 was primarily due to a $131.8 million increase mostly in business development expenses and underwriting costs, as a result of applying the new revenue standard to results of operations for 2018. The increase during 2018 was also due to an increase in technology and communication expenses due to higher costs associated with the development of the various trading systems and Jefferies Group's efforts to provide its professionals with modern digital tools to help them better serve its clients. The increase also includes higher professional service expenses due to an increase in legal and consulting fees.

In 2017, non-compensation expenses increased 5.9% compared to 2016. The increase in non-compensation expenses during 2017 was consistent with the increased activity associated with higher net revenues, as well as increased spending on technology. At the same time, non-compensation expenses as a percentage of Net revenues declined from 33.8% to 27.0% again demonstrating strategically the operating leverage inherent in Jefferies Group's business. The increase in non-compensation expenses was primarily due to an increase in Floor brokerage and clearing expenses due to the mix of costs across certain equities and fixed income businesses, technology and communications expenses due to costs associated with the development of the various trading systems and projects associated with corporate support and core business infrastructures, and an increase in certain other expenses.

Merchant Banking

A summary of results for Merchant Banking is as follows (in thousands):
 
Eleven Months Ended November 30, 2018
 
Twelve Months Ended December 31, 2017
 
Twelve Months Ended December 31, 2016
 
 
 
 
 
 
Net revenues
$
571,831

 
$
876,180

 
$
621,804

 
 
 
 
 
 
Expenses:
 
 
 

 
 

Compensation and benefits
77,169

 
73,811

 
84,486

Cost of sales
307,071

 
280,952

 
337,039

Interest
35,159

 
42,259

 
36,876

Depreciation and amortization
48,852

 
44,257

 
53,286

Selling, general and other expenses
150,115

 
131,627

 
179,527

Total expenses
618,366

 
572,906

 
691,214

Income (loss) before income taxes and income (loss) related to associated companies
(46,535
)
 
303,274

 
(69,410
)
Income (loss) related to associated companies
57,023

 
(74,901
)
 
154,598

Income from continuing operations before income taxes
$
10,488

 
$
228,373

 
$
85,188


Merchant Banking includes the consolidated results of Vitesse Energy Finance and JETX Energy (oil and gas production and development), Conwed and Idaho Timber (manufacturing companies), LAM (asset management) and Foursight Capital (vehicle finance). It also includes our ownership of Spectrum Brands/HRG shares, which is accounted for at fair value and impacts our results through its mark-to-market adjustments reflected in Net revenues, our investment in WeWork and the results of our investment in FXCM.  Interest and gains related to the note receivable component of our FXCM investment are included in Net revenues, while income (loss) related to our equity method investment in FXCM is included in Income (loss) related to associated companies. Additionally, Merchant Banking includes our equity investments in National Beef (beef processing), Berkadia, prior to its transfer to Jefferies Group on October 1, 2018 (commercial mortgage banking, investment sales and servicing), HomeFed (real estate company), Garcadia, prior to its sale in August 2018 (automobile dealerships), Linkem (fixed wireless broadband services in Italy) and Golden Queen (a gold and silver mining project).

31


In the fourth quarter of 2018, we amalgamated all our primary financial services operating businesses into one platform by transferring our 50% membership interest in Berkadia and our LAM seed investments into Jefferies Group. Revenues related to the net assets transferred were $6.7 million, $49.6 million and $26.5 million for the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and 2016, respectively. Income from continuing operations before income taxes related to the net assets transferred were $47.7 million, $118.4 million and $109.4 million for the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and 2016, respectively.

The following provides a summary of net revenues by source (in thousands):
 
Eleven Months Ended November 30, 2018
 
Twelve Months Ended December 31, 2017
 
Twelve Months Ended December 31, 2016
 
 
 
 
 
 
Vitesse Energy Finance and JETX Energy
$
169,667

 
$
45,225

 
$
53,549

Manufacturing
357,513

 
504,508

 
415,752

LAM
(5,447
)
 
74,990

 
(75,508
)
FXCM
18,616

 
23,160

 
(54,634
)
Vehicle Finance
64,969

 
60,187

 
50,152

Spectrum Brands/HRG
(412,493
)
 
64,774

 
93,200

Other
379,006

 
103,336

 
139,293

Total net revenues
$
571,831

 
$
876,180

 
$
621,804


Oil and gas revenues for 2018 increased due to Vitesse Energy Finance's acquisition of additional non-operated Bakken assets in the second quarter of 2018 as well as an increase in oil prices in 2018 compared to 2017. Vitesse Energy Finance and JETX Energy net revenues also include net unrealized gains (losses) of $29.1 million, $1.8 million and $(11.8) million related to derivatives during the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and 2016, respectively. As discussed further in Note 5 to our consolidated financial statements, Vitesse Energy Finance uses swaps and call and put options in order to reduce exposure to future oil price fluctuations. JETX Energy revenues during the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and 2016 were impacted by $12.1 million, $(20.1) million and $9.6 million, respectively, of unrealized gains (losses) on a trading asset which is held at fair value.

Net revenues for manufacturing for the twelve months ended December 31, 2017 include the gain on the sale of Conwed of $178.2 million. In January 2017, we sold 100% of Conwed to Schweitzer-Mauduit International, Inc., (NYSE: SWM) for $295 million in cash plus potential earn-out payments in 2019, 2020 and 2021 totaling up to $40 million in cash to the extent the results of Conwed's subsidiary, Filtrexx International, exceed certain performance thresholds. Excluding the gain on the sale of Conwed, net revenues for manufacturing increased in 2018 as compared to 2017, due primarily to an increase in sales at Idaho Timber. Net manufacturing revenues in 2017 as compared to 2016 increased due to the gain on the sale of Conwed, partially offset by the absence of Conwed revenues through the majority of 2017.

The decrease in LAM net revenues in 2018 as compared to 2017 primarily reflects lower principal transactions revenue due to two strategies negatively impacted by exceptional volatility during the first quarter of 2018. The year-over-year increase in 2017 LAM net revenues as compared to 2016 primarily reflects better returns on investments.

As more fully discussed in Note 5 to our consolidated financial statements, on September 1, 2016, we amended the terms of our loan and associated rights related to FXCM. Among other changes, the amendments gave Jefferies a 50% voting interest in FXCM and we gained the ability to significantly influence FXCM through our seats on the board. As a result of the amendment, we have accounted for our equity interest in FXCM under the equity method of accounting since September 1, 2016. Net revenues include gains of $18.6 million and $23.2 million during the eleven months ended November 30, 2018 and twelve months ended December 31, 2017, respectively, from our FXCM term loan and a loss of $(54.6) million during the twelve months ended December 31, 2016 from our FXCM term loan and related rights. This includes the component related to interest income, which is recorded within Principal transactions revenues.

Spectrum Brands/HRG net revenues reflect changes in the value of our investment. We classify Spectrum Brands/HRG as a trading asset for which the fair value option was elected and we reflect mark-to-market adjustments through Principal transactions revenue.


32


Other revenues for the eleven months ended November 30, 2018 reflect the gain on sale of our equity interests in Garcadia and our associated real estate of $221.7 million. Other net revenues for the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and 2016, respectively, also include a $70.9 million, $6.1 million and $65.6 million increase in the fair value of WeWork. Net revenues for the twelve months ended December 31, 2017 include a $19.7 million realized security gain from an investment in a non-public security.
 
The following provides a summary of total expenses by source (in thousands):
 
Eleven Months Ended November 30, 2018
 
Twelve Months Ended December 31, 2017
 
Twelve Months Ended December 31, 2016
 
 
 
 
 
 
Vitesse Energy Finance and JETX Energy
$
116,017

 
$
71,258

 
$
144,429

Manufacturing
321,851

 
296,491

 
375,990

LAM
74,029

 
44,844

 
32,318

Vehicle Finance
65,461

 
68,444

 
69,074

Other
41,008

 
91,869

 
69,403

Total expenses
$
618,366

 
$
572,906

 
$
691,214

Total expenses for Vitesse Energy Finance and JETX Energy in 2018 increased compared to 2017, primarily due to Vitesse Energy Finance's acquisition of additional non-operated Bakken assets in the second quarter of 2018. Selling, general and other expenses in 2016 include impairment charges of $63.8 million recorded by JETX Energy. The impairment charge primarily related to decisions made by JETX Energy in the third quarter of 2016 to curtail development of both its southern acreage in the East Eagle Ford and its Houston County acreage. A $55.0 million impairment charge was recorded for the difference between the carrying value of that acreage and the estimated net realizable value. The 2016 impairment also included the write-down of certain JETX Energy leases that would not benefit its business going forward.
The increase in total expenses for manufacturing in 2018 as compared to 2017 primarily relates to an increase in cost of sales associated with an increase in sales at Idaho Timber. The decrease in manufacturing expenses for 2017 as compared to 2016 is primarily due to the sale of Conwed in the first quarter of 2017.
Total expenses for LAM were impacted by the growth of our business in 2018 and 2017 as compared to the prior years.
Other expenses for 2017 reflect the write-down of a note receivable of $20.0 million related to the prior sale of a subsidiary. The decrease in other expenses in 2018 also reflects the deconsolidation of a real estate investment in 2017.

The following provides a summary of Income (loss) related to associated companies (in thousands):
 
Eleven Months Ended November 30, 2018
 
Twelve Months Ended December 31, 2017
 
Twelve Months Ended December 31, 2016
 
 
 
 
 
 
National Beef
$
110,049

 
$

 
$

Berkadia
80,092

 
93,801

 
94,201

FXCM
(83,174
)
 
(177,644
)
 
1,919

Garcadia Companies
21,646

 
48,198

 
52,266

Linkem
(20,534
)
 
(32,561
)
 
(22,867
)
HomeFed
(4,332
)
 
7,725

 
23,893

Golden Queen
(51,990
)
 
(7,733
)
 
(3,021
)
Other
5,266

 
(6,687
)
 
8,207

Total income (loss) related to associated companies
$
57,023

 
$
(74,901
)
 
$
154,598



33


Income (loss) related to associated companies primarily includes our investments in National Beef, subsequent to June 5, 2018 and the Garcadia Companies, prior to their sale in August 2018. Income (loss) related to associated companies during the eleven months ended November 30, 2018 includes a $47.9 million impairment loss related to our equity investment in Golden Queen in the third quarter of 2018. As discussed further in Note 11, Golden Queen completed an updated mine plan and financial projections in the third quarter of 2018 reflecting lower grades of gold as well as a decrease in the market price of gold. As a result of lower projected cash flows, the estimated fair value of our equity interest in Golden Queen was lower than our carrying value by $47.9 million and an impairment of $47.9 million was recorded in the third quarter of 2018.

Income (loss) related to associated companies during the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017, respectively, includes a $62.1 million and $130.2 million impairment loss related to our equity investment in FXCM. As discussed further in Note 11, in the fourth quarter of 2018, we updated expectations for FXCM based on recent revised regulations of the European Securities Market Authority and dampened operating results. Based on the decline in projections and the adverse effects of the European regulations, we evaluated in the fourth quarter whether our equity method investment was fully recoverable. Our estimate of fair value was based on a discounted cash flow analysis. The estimated fair value of our equity interest in FXCM was lower than our carrying value by $62.1 million and an impairment of $62.1 million was recorded in the fourth quarter of 2018.

In the first quarter of 2017, Global Brokerage Holdings and FXCM's U.S. subsidiary, Forex Capital Markets LLC ("FXCM U.S.") settled complaints filed by the NFA and CFTC against FXCM U.S. and certain of its principals relating to matters that occurred between 2010 and 2014. As part of the settlements, FXCM U.S. withdrew from business and sold FXCM U.S.'s customer accounts. FXCM also implemented a restructuring plan that included the termination of approximately 22% of its global workforce. Based on the above actions, we evaluated in the first quarter of 2017 whether our equity method investment was fully recoverable. Our estimate of fair value was based on a discounted cash flow and comparable public company analysis. The result of our analysis indicated that the estimated fair value of our equity interest in FXCM was lower than our carrying value by $130.2 million and an impairment of $130.2 million was recorded in the first quarter of 2017.
A summary of results for Merchant Banking by source is as follows (in thousands):
 
Eleven Months Ended November 30, 2018
 
Twelve Months Ended December 31, 2017
 
Twelve Months Ended December 31, 2016
 
 
 
 
 
 
Vitesse Energy Finance and JETX Energy
$
53,650

 
$
(26,033
)
 
$
(90,880
)
Manufacturing
35,662

 
208,017

 
39,762

LAM
(79,476
)
 
30,146

 
(107,826
)
FXCM
18,616

 
23,160

 
(54,634
)
Vehicle Finance
(492
)
 
(8,257
)
 
(18,922
)
Spectrum Brands/HRG
(412,493
)
 
64,774

 
93,200

Other
337,998

 
11,467

 
69,890

Income (loss) before income taxes and income (loss) related to associated companies
(46,535
)
 
303,274

 
(69,410
)
Income (loss) related to associated companies
57,023

 
(74,901
)
 
154,598

Income from continuing operations before income taxes
$
10,488

 
$
228,373

 
$
85,188

Other results for the eleven months ended November 30, 2018 reflect the gain on sale of our equity interests in Garcadia and our associated real estate of $221.7 million. Other results for the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and 2016, respectively, also include a $70.9 million, $6.1 million and $65.6 million increase in the fair value of WeWork.

34


Corporate
A summary of results of operations for Corporate is as follows (in thousands):
 
Eleven Months Ended November 30, 2018
 
Twelve Months Ended December 31, 2017
 
Twelve Months Ended December 31, 2016
 
 
 
 
 
 
Net revenues
$
22,300

 
$
6,306

 
$
2,689

 
 
 
 
 
 
Expenses:
 
 
 

 
 

Compensation and benefits
50,222

 
46,655

 
35,015

Depreciation and amortization
3,169

 
3,470

 
3,619

Selling, general and other expenses
35,049

 
34,983

 
36,399

Total expenses
88,440

 
85,108

 
75,033

Loss from continuing operations before income taxes
$
(66,140
)
 
$
(78,802
)
 
$
(72,344
)
Net revenues primarily include realized and unrealized securities gains and interest income for investments held at the holding company. For the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and 2016, Compensation and benefits expense includes share-based compensation expense of $21.4 million, $20.9 million and $9.7 million, respectively.
Parent Company Interest
Parent company interest totaled $54.1 million, $58.9 million and $58.9 million for the eleven months ended November 30, 2018 and the twelve months ended December 31, 2017 and 2016, respectively.
Income Taxes
On December 22, 2017, the Tax Act was enacted. The Tax Act is one of the most comprehensive changes in the U.S. corporate income tax since 1986 and certain provisions are complex in their application. We recorded a discrete tax expense of $450.5 million as a provisional estimate of the impact of the Tax Act during the twelve months ended December 31, 2017. This provisional estimate primarily consisted of a $415.0 million expense related to the revaluation of our deferred tax asset and a $35.5 million expense related to the deemed repatriation of foreign earnings. During the eleven months ended November 30, 2018, we adjusted the provisional estimate by approximately $8.3 million, bringing the total amount to date to $458.8 million. This consists of a $420.7 million expense related to the revaluation of our deferred tax asset and a $38.1 million expense related to the deemed repatriation of foreign earnings. Additionally, income tax expense for the eleven months ended November 30, 2018 has been impacted by certain tax planning actions taken with respect to our non-U.S. subsidiaries as a result of the Tax Act. The provisional accounting charge may change until the accounting analysis is finalized, which will occur in the first quarter of fiscal 2019, as permitted by Staff Accounting Bulletin No. 118 ("SAB 118"), which was issued by the SEC on December 22, 2017. See Note 21 to our consolidated financial statements for further details on the Tax Act and SAB 118.
For the eleven months ended November 30, 2018, our provision for income taxes from continuing operations was $19.0 million, representing an effective tax rate of 6.4%. Our 2018 provision was reduced by a $48.1 million benefit resulting from a reversal of our valuation allowance with respect to certain federal and state NOLs, which we believe are more likely than not to be utilized before they expire. This benefit reduced our effective tax rate by approximately 16.2%.
For the twelve months ended December 31, 2017, our provision for income taxes from continuing operations was $642.3 million, representing an effective tax rate of about 106%. Our 2017 provision was impacted by a non-cash $450.5 million charge related to the impact of tax reform. This charge increased our effective rate by 74%.
For the twelve months ended December 31, 2016, our provision for income taxes from continuing operations was $25.8 million, on a pre-tax loss from continuing operations of $12.6 million. Our 2016 provision was increased by a $24.9 million charge related to previously issued stock awards.

35


Discontinued Operations
On June 5, 2018, we sold 48% of National Beef to Marfrig for $907.7 million in cash, reducing our ownership in National Beef to 31%. We account for our remaining interest under the equity method of accounting. The sale of National Beef meets the accounting criteria to be classified as a discontinued operation as the sale represents a strategic shift in our operations and financial results. As such, we classified the results of National Beef prior to June 5, 2018 as a discontinued operation and it is reported in Income from discontinued operations, net of income tax provision in the Consolidated Statements of Operations. In addition, we recognized a pre-tax gain as a result of the transaction of $873.5 million ($643.9 million after-tax) for the eleven months ended November 30, 2018, which has been recognized as Gain on disposal of discontinued operations, net of income tax provision in our Consolidated Statements of Operations.

A summary of results of discontinued operations for National Beef is as follows (in thousands):

 
 
Period Ended June 4, 2018 (1)
 
Twelve Months Ended December 31, 2017
 
Twelve Months Ended December 31, 2016
Revenues:
 
 
 
 
 
 
Beef processing services
 
$
3,137,611

 
$
7,353,663

 
$
7,021,902

Interest income
 
131

 
339

 
166

Other
 
4,329

 
4,946

 
5,175

Total revenues
 
3,142,071

 
7,358,948

 
7,027,243

 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

Compensation and benefits
 
17,414

 
39,884

 
39,271

Cost of sales
 
2,884,983

 
6,764,055

 
6,513,768

Interest expense
 
4,316

 
6,657

 
12,946

Depreciation and amortization
 
43,959

 
98,515

 
94,482

Selling, general and other expenses
 
14,291

 
42,525

 
37,754

Total expenses
 
2,964,963

 
6,951,636

 
6,698,221

 
 
 
 
 
 
 
Income from discontinued operations before income taxes
 
177,108

 
407,312

 
329,022

Income tax provision
 
47,045

 
118,681

 
96,336

Income from discontinued operations, net of income tax provision
 
$
130,063

 
$
288,631

 
$
232,686


(1) The operations of National Beef from January 1, 2018 through June 4, 2018, are included in discontinued operations for our eleven months ended November 30, 2018.

National Beef's profitability is dependent, in large part, on the spread between its cost for live cattle, the primary raw material for its business, and the value received from selling boxed beef and other products, coupled with its overall volume. National Beef operates in a large and liquid commodity market and it does not have much influence over the price it pays for cattle or the selling price it receives for the products it produces. National Beef's profitability typically fluctuates seasonally, with relatively higher margins in the spring and summer months and during times of ample cattle availability. National Beef's fiscal year consisted of 52 or 53 weeks, ending on the last Saturday in December. National Beef's fiscal year 2017 consisted of 52 weeks and its fiscal year 2016 consisted of 53 weeks.
  
Throughout 2018, demand for beef and cattle supply remained strong, supporting favorable margin conditions.

Revenues in 2017 increased 5% in comparison to 2016, primarily due to an increase in the number of cattle processed. Cost of sales increased by 4% in 2017 as compared to 2016. The increase is also due to an increase in the number of cattle processed. The combined effects of increased margin per head and an increase in volume led to higher profitability in 2017 as compared to 2016.
Lower average debt balances in 2017 led to a 49% decline in interest expense in 2017 as compared to 2016. 
For further information, see Note 28 to our consolidated financial statements.

36


Selected Statement of Financial Condition Data

In addition to preparing our Consolidated Statements of Financial Condition in accordance with accounting principles generally accepted in the United States of America ("GAAP"), we also review the tangible capital associated with each of our businesses and investments, which is a non-GAAP presentation and may not be comparable to similar non-GAAP presentations used by other companies. We believe that this information is useful to investors as it allows them to view our businesses and investments through the eyes of management while facilitating a comparison across historical periods. We define tangible capital as Total Jefferies Financial Group Inc. shareholders' equity less Intangible assets, net and goodwill. As a result of the transactions and our current operating strategy, we have made changes to reflect the way we currently manage our business, and have reclassified the December 31, 2017 balances to conform to current year presentation.

The tables below reconcile tangible capital to our GAAP balance sheet (in thousands):
 
November 30, 2018
 
Jefferies Group
 
Merchant Banking
 
Corporate
 
Consolidation Adjustments
 
Total
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
5,145,886

 
$
56,810

 
$
56,113

 
$

 
$
5,258,809

Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations
707,960

 

 

 

 
707,960

Financial instruments owned
16,399,526

 
1,063,730

 
1,409,886

 

 
18,873,142

Loans to and investments in associated companies
997,524

 
1,419,808

 

 

 
2,417,332

Securities borrowed
6,538,212

 

 

 

 
6,538,212

Securities purchased under agreements to resell
2,785,758

 

 

 

 
2,785,758

Receivables
5,563,157

 
721,405

 
2,839

 

 
6,287,401

Intangible assets, net and goodwill
1,880,849

 
9,282

 

 

 
1,890,131

Deferred tax asset, net
243,240

 

 
269,549

 

 
512,789

Other assets
962,872

 
919,449

 
99,650

 
(122,410
)
 
1,859,561

    Total Assets
41,224,984

 
4,190,484

 
1,838,037

 
(122,410
)
 
47,131,095

 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
Long-term debt (1)
6,546,283

 
81,164

 
990,116

 

 
7,617,563

Other liabilities
28,440,086

 
747,990

 
223,830

 
(122,410
)
 
29,289,496

  Total liabilities
34,986,369

 
829,154

 
1,213,946

 
(122,410
)
 
36,907,059

 
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests

 
19,779

 

 

 
19,779

Mandatorily redeemable convertible preferred shares

 

 
125,000

 

 
125,000

Noncontrolling interests
1,911

 
16,480

 

 

 
18,391

Total Jefferies Financial Group Inc. shareholders' equity
$
6,236,704

 
$
3,325,071

 
$
499,091

 
$

 
$
10,060,866

 
 
 
 
 
 
 
 
 
 
Reconciliation to Tangible Capital
 
 
 
 
 
 
 
 
 
Total Jefferies Financial Group Inc. shareholders' equity
$
6,236,704

 
$
3,325,071

 
$
499,091

 
$

 
$
10,060,866

Less: Intangible assets, net and goodwill
(1,880,849
)
 
(9,282
)
 

 

 
(1,890,131
)
Tangible Capital, a non-GAAP measure
$
4,355,855

 
$
3,315,789

 
$
499,091

 
$

 
$
8,170,735


(1) Long-term debt within Merchant Banking of $81.2 million at November 30, 2018, primarily includes $77.8 million for Vitesse Energy Finance.

37


 
December 31, 2017
 
Jefferies Group
 
National Beef
 
Merchant Banking
 
Corporate
 
Consolidation Adjustments
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
5,164,492

 
$
18,516

 
$
55,815

 
$
36,657

 
$

 
$
5,275,480

Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations
578,014

 

 

 

 

 
578,014

Financial instruments owned
14,193,352

 
2,880

 
1,974,930

 
628,075

 

 
16,799,237

Loans to and investments in associated companies
682,790

 

 
1,384,039

 

 

 
2,066,829

Securities borrowed
7,721,803

 

 

 

 

 
7,721,803

Securities purchased under agreements to resell
3,689,559

 

 

 

 

 
3,689,559

Receivables
4,459,827

 
201,675

 
754,470

 
3,043

 

 
5,419,015

Intangible assets, net and goodwill
1,899,093

 
554,541

 
9,546

 

 

 
2,463,180

Deferred tax asset, net
212,954

 

 

 
530,857

 

 
743,811

Other assets
973,848

 
682,927

 
724,730

 
100,996

 
(70,321
)
 
2,412,180

    Total Assets
39,575,732

 
1,460,539

 
4,903,530

 
1,299,628

 
(70,321
)
 
47,169,108

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 

Long-term debt (1)
6,416,844

 
199,221

 
280,697

 
989,021

 

 
7,885,783

Other liabilities
27,514,235

 
332,111

 
706,430

 
110,298

 
(70,321
)
 
28,592,753

  Total liabilities
33,931,079

 
531,332

 
987,127

 
1,099,319

 
(70,321
)
 
36,478,536

 
 
 
 
 
 
 
 
 
 
 

Redeemable noncontrolling interests

 
412,128

 
14,465

 

 

 
426,593

Mandatorily redeemable convertible preferred shares

 

 

 
125,000

 

 
125,000

Noncontrolling interests
737

 

 
32,285

 

 

 
33,022

Total Jefferies Financial Group Inc. shareholders' equity
$
5,643,916

 
$
517,079

 
$
3,869,653

 
$
75,309

 
$

 
$
10,105,957