What’s a company to do when one of its top employees is accused of wild partying, excessive drug use and having sex with a client’s girlfriend? If you’re Jefferies, the investment bank, you fire back with a bold memo from the CEO.
It was a good memo but a bad strategy.
Jefferies has made something of a habit of writing lengthy, candid letters when it lands in the news. It did so quite successfully in 2011 to face down rumors that it was about to follow MF Global into oblivion. Jefferies not only wrote a memo but offered extensive detail about its financial condition, bond holdings and funding. It was able to answer rumors with facts.
That’s harder to do in this situation, where the allegations come from a contested divorce and child custody proceeding between Sage Kelly, the head of the healthcare banking group at Jefferies, and his wife, Christina. Establishing the facts is out of Jefferies’s control – running bankers through drug tests doesn’t do it. A ruling by the judge in the case will ultimately decide the facts, and that is probably months away.
Jefferies should have paid closer attention to two things before pushing the send button on the memo.
First, it should have recognized that the memo would to amplify the story, not quell it.
The story was a hot topic across Wall Street largely because of articles in the New York Post and a host of small but potent blogs. To CEO Richard Handler and Chairman Brian Friedman, it must have felt like an onslaught of unwanted attention. In reality, few outside the financial community had seen the news. Now, thanks to the memo and the press coverage it received, the whole world knows the story.
Perhaps Jefferies knew its memo would spark wider coverage and thought it could benefit the firm. If so, they misjudged the likely reaction. The articles and the online comments from readers show people believe there’s a germ of truth in the allegations.
Second, Jefferies should have known that its reputation would make an effective response more difficult.
A firm’s reputation is like a prism through which all its news is seen. It helps calibrate the reader’s default setting – the established ideas about a company’s products, brand and people. Jefferies is a Wall Street firm with a feisty, hard-charging reputation and a record of past brushes with excess. This story fit the Jefferies narrative perfectly.
Christina Kelly and her lawyers knew this, and that’s why they chose to leak their story to the press in the first place. But the lesson was lost on Messrs Handler and Friedman.
This isn’t a courtroom, after all, where the accused are presumed innocent. Given its reputation Jefferies is presumed guilty. That might not be fair but it’s a fact.
The better strategy would have been to tear up the memo, put out a short public statement, speak to the troops (and any rattled clients) verbally and wait for the story to die.
Sometimes the toughest thing to do in a crisis is to show restraint. That is often a rare commodity on Wall Street.