UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-14947

JEFFERIES GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware		95-4719745
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
520 Madison Avenue, 10th Floor, New York, New York		10022
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (212) 284-2550

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

     Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

     Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

     Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 202,150,582 shares as of the close of business on June 22, 2011.

 

 

JEFFERIES GROUP, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
MAY 31, 2011

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition (unaudited) — May 31, 2011 and November 30, 2010			3
Consolidated Statements of Earnings (unaudited) — Three and Six Months Ended May 31, 2011 and Three and Five Months Ended May 31, 2010			5
Consolidated Statements of Changes in Stockholders’ Equity (unaudited) — Six Months Ended May 31, 2011 and Year Ended November 30, 2010			6
Consolidated Statements of Comprehensive Income (unaudited) — Three and Six Months Ended May 31, 2011 and Three and Five Months Ended May 31, 2010			7
Consolidated Statements of Cash Flows (unaudited) — Six Months Ended May 31, 2011 and Five Months Ended May 31, 2010			8
Notes to Consolidated Financial Statements (unaudited)			10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			59
Item 3. Quantitative and Qualitative Disclosures About Market Risk			84
Item 4. Controls and Procedures			86
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			86
Item 1A. Risk Factors			86
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			87
Item 6. Exhibits			88
Signature			89
EX-31.1
EX-31.2
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

		May 31,				November 30,
		2011				2010
ASSETS
Cash and cash equivalents (including $219,335 in 2011 and $202,565 in 2010, from VIEs)		$	2,498,737			$	2,188,998
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations			1,219,917				1,636,755
Financial instruments owned, at fair value, including securities pledged of $14,712,257 and $12,338,728 in 2011 and 2010, respectively:
Corporate equity securities (including $181,027 in 2011 and $120,606 in 2010 from VIEs)			1,713,425				1,565,793
Corporate debt securities (including $350,507 in 2011 and $462,462 in 2010 from VIEs)			4,433,196				3,630,616
Government, federal agency and other sovereign obligations			5,617,698				5,191,973
Mortgage- and asset-backed securities (including $42,821 in 2011 and $43,355 in 2010 from VIEs)			5,187,115				4,921,565
Loans and other receivables (including $480,918 in 2011 and $362,465 in 2010 from VIEs)			608,993				434,573
Derivatives (including $13,879 in 2011 and $7,579 in 2010 from VIEs)			136,384				119,268
Investments, at fair value (including $2,762 in 2011 and $15,612 in 2010 from VIEs)			71,033				77,784
Total financial instruments owned, at fair value (including $1,071,914 in 2011 and $1,012,079 in 2010 from VIEs)			17,767,844				15,941,572
Investments in managed funds			125,303				131,585
Other investments			429,020				220,323
Securities borrowed			8,258,188				8,152,678
Securities purchased under agreements to resell			3,326,200				3,252,322
Securities received as collateral			51,984				48,616
Receivables:
Brokers, dealers and clearing organizations (including $177,889 in 2011 and $195,485 in 2010 from VIEs)			3,879,969				2,550,234
Customers			1,805,715				1,328,365
Fees, interest and other (including $6,925 in 2011 and $127 in 2010 from VIEs)			287,655				165,603
Premises and equipment			150,500				142,729
Goodwill			367,131				364,964
Other assets (including $241 in 2011 and $370 in 2010 from VIEs)			798,371				601,799
Total assets (including $1,476,304 in 2011 and $1,410,626 in 2010 from VIEs)		$	40,966,534			$	36,726,543

Continued on next page.

JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) — CONTINUED
(Dollars in thousands, except per share amounts)

		May 31,				November 30,
		2011				2010
LIABILITIES AND STOCKHOLDERS’ EQUITY
Financial instruments sold, not yet purchased, at fair value:
Corporate equity securities (including $0 in 2011 and $2,708 in 2010 from VIEs)		$	1,803,991			$	1,638,372
Corporate debt securities (including $272,876 in 2011 and $443,100 in 2010 from VIEs)			2,287,160				2,375,925
Government, federal agency and other sovereign obligations			7,056,721				4,735,288
Mortgage- and asset-backed securities			38,235				129,384
Loans (including $162,285 in 2011 and $150,100 in 2010 from VIEs)			165,750				171,278
Derivatives (including $0 in 2011 and $136 in 2010 from VIEs)			111,406				59,552
Total financial instruments sold, not yet purchased, at fair value (including $435,161 in 2011 and $596,044 in 2010 from VIEs)			11,463,263				9,109,799
Securities loaned			3,202,149				3,108,977
Securities sold under agreements to repurchase			9,159,727				10,684,056
Obligation to return securities received as collateral			51,984				48,616
Payables:
Brokers, dealers and clearing organizations (including $174,175 in 2011 and $157,134 in 2010 from VIEs)			3,294,826				1,885,357
Customers			4,062,631				3,716,357
Accrued expenses and other liabilities (including $125,936 in 2011 and $94,402 in 2010 from VIEs)			1,203,575				1,142,850
Long-term debt			4,579,215				3,778,681
Mandatorily redeemable convertible preferred stock			125,000				125,000
Mandatorily redeemable preferred interest of consolidated subsidiaries (including $327,790 in 2011 and $315,885 in 2010 from VIEs)			327,790				315,885
Total liabilities (including $1,063,062 in 2011 and $1,163,465 in 2010 from VIEs)			37,470,160				33,915,578
STOCKHOLDERS’ EQUITY
Common stock, $.0001 par value. Authorized 500,000,000 shares; issued 212,148,852 shares in 2011 and 200,301,656 shares in 2010			21				20
Additional paid-in capital			2,399,782				2,218,123
Retained earnings			986,283				850,654
Less:
Treasury stock, at cost, 9,994,438 shares in 2011 and 28,607,510 shares in 2010			(193,024	)			(539,530	)
Accumulated other comprehensive loss:
Currency translation adjustments			(19,362	)			(42,859	)
Additional minimum pension liability			(8,419	)			(8,419	)
Total accumulated other comprehensive loss			(27,781	)			(51,278	)
Total common stockholders’ equity			3,165,281				2,477,989
Noncontrolling interests			331,093				332,976
Total stockholders’ equity			3,496,374				2,810,965
Total liabilities and stockholders’ equity		$	40,966,534			$	36,726,543

See accompanying unaudited notes to consolidated financial statements.

JEFFERIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
(In thousands, except per share amounts)

										Six Months				Five Months
		Three Months Ended								Ended				Ended
		May 31, 2011				May 31, 2010				May 31, 2011				May 31, 2010
Revenues:
Commissions		$	129,291			$	146,001			$	249,212			$	228,956
Principal transactions			175,316				153,986				465,468				246,642
Investment banking			328,421				255,958				567,480				352,257
Asset management fees and investment income from managed funds			10,547				13,929				34,415				11,018
Interest			304,425				243,183				577,641				386,168
Other			22,117				18,983				42,578				27,363
Total revenues			970,117				832,040				1,936,794				1,252,404
Interest expense			242,952				164,504				451,246				257,234
Net revenues			727,165				667,536				1,485,548				995,170
Interest on mandatorily redeemable preferred interest of consolidated subsidiaries			4,415				2,018				20,854				2,513
Net revenues, less mandatorily redeemable preferred interest			722,750				665,518				1,464,694				992,657
Non-interest expenses:
Compensation and benefits			431,936				384,311				874,828				568,407
Floor brokerage and clearing fees			31,384				35,509				59,517				54,089
Technology and communications			49,850				41,932				93,525				68,054
Occupancy and equipment rental			20,437				19,056				38,416				31,016
Business development			22,457				15,216				42,395				24,985
Professional services			16,099				11,284				29,375				21,694
Other			20,103				14,530				33,223				27,818
Total non-interest expenses			592,266				521,838				1,171,279				796,063
Earnings before income taxes			130,484				143,680				293,415				196,594
Income tax expense			45,784				56,189				106,670				76,403
Net earnings			84,700				87,491				186,745				120,191
Net earnings to noncontrolling interests			4,084				3,665				18,788				3,994
Net earnings to common shareholders		$	80,616			$	83,826			$	167,957			$	116,197
Earnings per common share:
Basic		$	0.36			$	0.41			$	0.78			$	0.57
Diluted		$	0.36			$	0.41			$	0.78			$	0.57
Weighted average common shares:
Basic			210,751				196,944				205,054				197,759
Diluted			214,870				201,064				209,172				201,881

See accompanying unaudited notes to consolidated financial statements.

JEFFERIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(Dollars in thousands, except per share amounts)

		Six Months				Eleven Months
		Ended				Ended
		May 31, 2011				November 30, 2010
Common stock, par value $0.0001 per share
Balance, beginning of period		$	20			$	19
Issued			1				1
Balance, end of period			21				20
Additional paid-in capital
Balance, beginning of period			2,218,123				2,036,087
Benefit plan share activity (1)			12,512				19,230
Share-based expense, net of forfeitures and clawbacks			34,353				149,799
Proceeds from exercise of stock options			51				108
Acquisitions and contingent consideration			419				419
Tax benefit for issuance of share-based awards			32,434				2,965
Dividend equivalents on share-based plans			4,167				9,515
Issuance of treasury stock			97,723				—
Balance, end of period			2,399,782				2,218,123
Retained earnings
Balance, beginning of period			850,654				688,039
Net earnings to common shareholders			167,957				223,666
Dividends			(32,328	)			(61,051	)
Balance, end of period			986,283				850,654
Treasury stock, at cost
Balance, beginning of period			(539,530	)			(384,379	)
Purchases			(41,567	)			(140,071	)
Returns / forfeitures			(9,049	)			(15,080	)
Issued			397,122				—
Balance, end of period			(193,024	)			(539,530	)
Accumulated other comprehensive (loss) income
Balance, beginning of period			(51,278	)			(41,626	)
Currency adjustment			23,497				(8,490	)
Pension adjustment, net of tax			—				(1,162	)
Balance, end of period			(27,781	)			(51,278	)
Total common stockholders’ equity			3,165,281				2,477,989
Noncontrolling interests
Balance, beginning of period			332,976				321,538
Net earnings to noncontrolling interests			18,788				16,601
Contributions			1,213				12,433
Distributions			(21,884	)			(15,177	)
Deconsolidation of asset management entity			—				(5,477	)
Adoption of accounting changes to ASC 810			—				3,058
Balance, end of period			331,093				332,976
Total stockholders’ equity		$	3,496,374			$	2,810,965

See accompanying unaudited notes to consolidated financial statements.

JEFFERIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)

										Six Months				Five Months
		Three Months Ended								Ended				Ended
		May 31, 2011				May 31, 2010				May 31, 2011				May 31, 2010
Net earnings to common shareholders		$	80,616			$	83,826			$	167,957			$	116,197
Other comprehensive income:
Currency translation adjustments			8,985				16,600				23,497				30,983
Total other comprehensive income (1)			8,985				16,600				23,497				30,983
Comprehensive income		$	89,601			$	100,426			$	191,454			$	147,180

See accompanying unaudited notes to consolidated financial statements.

JEFFERIES GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)

		Six Months Ended				Five Months Ended
		May 31, 2011				May 31, 2010
Cash flows from operating activities:
Net earnings		$	186,745			$	120,191
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization			25,209				14,720
Fees related to assigned management agreements			(1,736	)			(1,587	)
Interest on mandatorily redeemable preferred interests of consolidated subsidiaries			20,854				2,513
Accruals related to various benefit plans and stock issuances, net of estimated forfeitures			37,817				18,011
Decrease (increase) in cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations			417,049				(323,250	)
Increase in receivables:
Brokers, dealers and clearing organizations			(1,274,030	)			(741,789	)
Customers			(473,600	)			(552,492	)
Fees, interest and other			(119,575	)			(50,866	)
Increase in securities borrowed			(58,616	)			(289,095	)
Increase in financial instruments owned			(1,645,394	)			(4,329,765	)
Increase in other investments			(209,105	)			(29,762	)
Decrease (increase) in investments in managed funds			6,282				(7,823	)
(Increase) decrease in securities purchased under agreements to resell			(46,590	)			302,795
Increase in other assets			(182,534	)			(184,498	)
Increase in payables:
Brokers, dealers and clearing organizations			1,386,872				443,574
Customers			344,807				114,208
Increase in securities loaned			54,510				572,189
Increase in financial instruments sold, not yet purchased			2,183,385				2,474,499
(Decrease) increase in securities sold under agreements to repurchase			(1,565,229	)			1,737,028
Increase in accrued expenses and other liabilities			15,487				23,298
Net cash used in operating activities			(897,392	)			(687,901	)
Cash flows from investing activities:
Net payments on premises and equipment			(27,568	)			(10,136	)
Cash received from contingent consideration			1,752				925
Cash paid for contingent consideration			—				(6,997	)
Net cash used in investing activities			(25,816	)			(16,208	)

Continued on next page.

JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS — CONTINUED (Unaudited)
(Dollars in thousands)

		Six Months Ended				Five Months Ended
		May 31, 2011				May 31, 2010
Cash flows from financing activities:
Excess tax benefits from the issuance of share-based awards		$	34,010			$	1,994
Gross proceeds from short-term borrowings			1,257,000				1,497,000
Gross payments on short-term borrowings			(1,257,000	)			(1,497,000	)
Net proceeds from (payments on):
Issuance of common shares			494,845				—
Issuance of senior notes, net of issuance costs			794,587				—
Mandatorily redeemable preferred interest of consolidated subsidiaries			(8,949	)			(17,066	)
Noncontrolling interest			(20,671	)			(14,408	)
Repurchase of common stock			(41,567	)			(103,336	)
Dividends			(28,161	)			(12,957	)
Exercise of stock options, not including tax benefits			51				108
Net cash provided by (used in) financing activities			1,224,145				(145,665	)
Effect of foreign currency translation on cash and cash equivalents			8,802				(9,109	)
Net increase (decrease) in cash and cash equivalents			309,739				(858,883	)
Cash and cash equivalents at beginning of period			2,188,998				1,853,167
Cash and cash equivalents at end of period		$	2,498,737			$	994,284
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest		$	363,397			$	237,138
Income taxes, net			129,984				84,090

See accompanying unaudited notes to consolidated financial statements.

JEFFERIES GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Index

		Page
Note 1. Organization and Basis of Presentation			11
Note 2. Summary of Significant Accounting Policies			13
Note 3. Cash, Cash Equivalents and Short-Term Investments			19
Note 4. Financial Instruments			20
Note 5. Derivative Financial Instruments			32
Note 6. Collateralized Transactions			36
Note 7. Securitization Activities and Variable Interest Entities			36
Note 8. Jefferies Finance LLC			42
Note 9. Acquisitions			43
Note 10. Short-Term Borrowings			45
Note 11. Long-Term Debt			45
Note 12. Mandatorily Redeemable Convertible Preferred Stock			46
Note 13 Noncontrolling Interest and Mandatorily Redeemable Preferred Interests of Consolidated Subsidiaries			46
Note 14. Benefit Plans			47
Note 15. Compensation Plans			47
Note 16. Earnings Per Share			52
Note 17. Income Taxes			53
Note 18. Commitments, Contingencies and Guarantees			53
Note 19. Net Capital Requirements			56
Note 20. Segment Reporting			56
Note 21. Related Party Transactions			58

JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Note 1. Organization and Basis of Presentation

Organization

The accompanying unaudited Consolidated Financial Statements include the accounts of Jefferies Group, Inc. and all its subsidiaries (together, “we” or “us”), including Jefferies & Company, Inc. (“Jefferies”), Jefferies Execution Services, Inc., (“Jefferies Execution”), Jefferies International Limited, Jefferies Hong Kong Limited, Jefferies Asset Management, LLC, Jefferies Financial Products, LLC and all other entities in which we have a controlling financial interest or are the primary beneficiary, including Jefferies High Yield Holdings, LLC (“JHYH”), Jefferies Special Opportunities Partners, LLC (“JSOP”) and Jefferies Employees Special Opportunities Partners, LLC (“JESOP”).

We operate in two business segments, Capital Markets and Asset Management. Capital Markets includes our securities trading (including the results of our indirectly partially-owned subsidiary, Jefferies High Yield Trading, LLC) and investment banking activities, which provides the research, sales, trading and origination effort for various equity, fixed income and advisory products and services. Asset Management provides investment management services to various private investment funds, separate accounts and mutual funds.

Change in Year End

On April 19, 2010, our Board of Directors approved a change to our fiscal year end from a calendar year basis to a fiscal year ending on November 30. As such, the current period represents the three and six months ended May 31, 2011 and has been reported on the basis of the new fiscal year. Our prior year period consisted of the three and five months ended May 31, 2010 and is reported on the basis of the previous calendar year cycle.

Basis of Presentation

The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. All adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. These unaudited consolidated financial statements should be read in conjunction with our Transition Report on Form 10-K for the eleven months ended November 30, 2010.

We have made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with GAAP. The most significant of these estimates and assumptions relate to fair value measurements, compensation and benefits, legal reserves and the realizability of deferred tax assets. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.

Consolidation

Our policy is to consolidate all entities in which we own more than 50% of the outstanding voting stock and have control. In addition, we consolidate entities which lack characteristics of an operating entity or business for which we are the primary beneficiary. The primary beneficiary is the party who has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and who has an obligation to absorb losses of the entity or a right to receive benefits from the entity that could potentially be significant to the entity. In situations where we have significant influence but not control of an entity that does not qualify as a variable interest entity, we apply the equity method of accounting or fair value accounting. We also have formed nonconsolidated investment vehicles with third-party investors that are typically organized as partnerships or limited liability companies. We act as general partner or managing member for these investment vehicles and have generally provided the third-party investors with termination or “kick-out” rights.

JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

Intercompany accounts and transactions are eliminated in consolidation.

Immaterial Restatements

As indicated in our Transition Report on Form 10-K for the eleven months ended November 30, 2010 (hereafter in this Note referred to as “adjustments”), we made correcting adjustments to our financial statements for the three and five months ended May 31, 2010 relating to the netting of interest income and interest expense, differences with our former clearing bank, and certain other immaterial adjustments. We do not believe that these adjustments are material to our financial statements for these periods. For additional information on these adjustments, see Note 1, Organization and Basis of Presentation, and Note 23, Selected Quarterly Financial Data (Unaudited), of the Consolidated Financial Statements of our Transition Report on Form 10-K for the eleven months ended November 30, 2010.

The following table sets forth the effects of the adjustments on Net earnings, on an after tax basis, for the three and five months ended May 31, 2010 (in thousands):

Decrease in Net earnings to common shareholders

		Three Months				Five Months
		Ended				Ended
		May 31, 2010				May 31, 2010
Previously reported Net earnings to common shareholders		$	84,832			$	118,539
Netting of interest revenues and expense			—				—
Differences with clearing bank			(766	)			(1,680	)
Other items (1)			(240	)			(662	)
Total adjustments			(1,006	)			(2,342	)
Adjusted Net earnings to common shareholders		$	83,826			$	116,197

The following table sets forth the effects of the adjustments on major caption items within our Consolidated Statement of Earnings for the three and five months ended May 31, 2010 (in thousands, except per share amounts):

JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(Unaudited)

		Three Months Ended								Five Months Ended
		May 31, 2010								May 31, 2010
		As Previously								As Previously
		Reported				Adjusted				Reported				Adjusted
Principal transactions		$	155,581			$	153,986			$	249,755			$	246,642
Interest			150,187				243,183				250,065				386,168
Total revenues			740,640				832,040				1,119,414				1,252,404
Interest expense			71,110				164,504				120,042				257,234
Net revenues			669,530				667,536				999,372				995,170
Net revenues, less mandatorily redeemable perferred interest			667,512				665,518				996,859				992,657
Floor brokerage and clearing fees			35,849				35,509				54,458				54,089
Total non-interest expenses			522,179				521,838				796,433				796,063
Earnings before income taxes			145,333				143,680				200,426				196,594
Income tax expense			56,836				56,189				77,893				76,403
Net earnings			88,497				87,491				122,533				120,191
Net earnings to common shareholders			84,832				83,826				118,539				116,197
Earnings per common share:
Basic		$	0.42			$	0.41			$	0.58			$	0.57
Diluted		$	0.41			$	0.41			$	0.58			$	0.57

These adjustments affected certain line items within cash flows from operating activities on the Consolidated Statement of Cash Flows for the five months ended May 31, 2010, with no net effect on net cash used in operating activities. In addition, supplemental disclosures for cash paid for interest were also adjusted.

Note 2. Summary of Significant Accounting Policies

Revenue Recognition Policies

Commissions. All customer securities transactions are reported on the Consolidated Statements of Financial Condition on a settlement date basis with related income reported on a trade-date basis. We permit institutional customers to allocate a portion of their gross commissions to pay for research products and other services provided by third parties. The amounts allocated for those purposes are commonly referred to as soft dollar arrangements. Soft dollar expenses amounted to $11.9 million and $11.3 million for the three months ended May 31, 2011 and 2010, respectively, and $22.4 million and $17.1 million for the six months ended May 31, 2011 and five months ended May 31, 2010, respectively. We account for the cost of these arrangements on an accrual basis. As we are not the primary obligor for these arrangements, expenses relating to soft dollars are netted against commission revenues.

Principal Transactions. Financial instruments owned and Financial instruments sold, but not yet purchased (all of which are recorded on a trade-date basis) are carried at fair value with gains and losses reflected in Principal transactions in the Consolidated Statements of Earnings on a trade date basis.

Investment Banking. Underwriting revenues and fees from mergers and acquisitions, restructuring and other investment banking advisory assignments or engagements are recorded when the services related to the underlying transactions are completed under the terms of the assignment or engagement. Expenses associated with such assignments are deferred until reimbursed by the client, the related revenue is recognized or the engagement is otherwise concluded. Out-of-pocket expenses are recorded net of client reimbursements. Revenues are presented net of related out-of-pocket unreimbursed expenses. Unreimbursed out-of-pocket expenses with no related revenues are included in Business development and Professional services expenses in the Consolidated Statements of Earnings.

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Asset Management Fees and Investment Income From Managed Funds. Asset management fees and investment income from managed funds include revenues we earn from management, administrative and performance fees from funds managed by us, revenues from management and performance fees we earn from related-party managed funds and investment income from our investments in these funds. We earn fees in connection with management and investment advisory services performed for various funds and managed accounts. These fees are based on assets under management or an agreed upon notional amount and may include performance fees based upon the performance of the funds. Management and administrative fees are generally recognized over the period that the related service is provided. Generally, performance fees are earned when the return on assets under management exceeds certain benchmark returns, “high-water marks” or other performance targets. Performance fees are accrued on a monthly basis and are not subject to adjustment once the measurement period ends (generally annual periods) and performance fees have been realized.

Interest Revenue and Expense. We recognize contractual interest on Financial instruments owned and Financial instruments sold, but not yet purchased, on an accrual basis as a component of interest revenue and expense. Interest flows on derivative trading transactions and dividends are included as part of the fair valuation of these contracts in Principal transactions in the Consolidated Statements of Earnings and are not recognized as a component of interest revenue or expense. We account for our short-term, long-term borrowings and our mandatorily redeemable convertible preferred stock on an accrual basis with related interest recorded as interest expense. In addition, we recognize interest revenue related to our securities borrowed and securities purchased under agreements to resell activities and interest expense related to our securities loaned and securities sold under agreements to repurchase activities on an accrual basis.

Cash Equivalents

Cash equivalents include highly liquid investments, including money market funds, not held for resale with original maturities of three months or less.

Cash and Securities Segregated and on Deposit for Regulatory Purposes or Deposited With Clearing and Depository Organizations

In accordance with Rule 15c3-3 of the Securities Exchange Act of 1934, Jefferies as a broker-dealer carrying client accounts, is subject to requirements related to maintaining cash or qualified securities in a segregated reserve account for the exclusive benefit of its clients. In addition, certain financial instruments used for initial and variation margin purposes with clearing and depository organizations are recorded in this caption.

Foreign Currency Translation

Assets and liabilities of foreign subsidiaries having non-U.S. dollar functional currencies are translated at exchange rates at the end of a period. Revenues and expenses are translated at average exchange rates during the period. The gains or losses resulting from translating foreign currency financial statements into U.S. Dollars, net of hedging gains or losses and taxes, if any, are included in Other comprehensive income. Gains or losses resulting from foreign currency transactions are included in Principal transactions in the Consolidated Statements of Earnings.

Financial Instruments

Financial instruments owned and Financial instruments sold, not yet purchased are recorded at fair value, either as required by accounting pronouncements or through the fair value option election. These instruments primarily represent our trading activities and include both cash and derivative products. Gains and losses are recognized in Principal transactions in our Consolidated Statements of Earnings. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price).

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Fair Value Hierarchy

In determining fair value, we maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs reflect our assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. We apply a hierarchy to categorize our fair value measurements broken down into three levels based on the transparency of inputs as follows:

		Level 1:		Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
		Level 2:		Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these financial instruments include cash instruments for which quoted prices are available but traded less frequently, derivative instruments whose fair value have been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed.
		Level 3:		Instruments that have little to no pricing observability as of the reported date. These financial instruments are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

The availability of observable inputs can vary and is affected by a wide variety of factors, including, for example, the type of financial instrument and market conditions. To the extent that valuation is based on models or input that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.

We use prices and inputs that are current as of the measurement date. As the observability of prices and inputs may change for a financial instrument from period to period, this condition may cause a transfer of an instrument among the fair value hierarchy levels. Transfers among the levels are recognized at the beginning of each period.

Valuation Process for Financial Instruments

Financial instruments are valued at quoted market prices, if available. Certain financial instruments have bid and ask prices that can be observed in the marketplace. For financial instruments whose inputs are based on bid-ask prices, we allow for mid-market pricing and adjust to the point within the bid-ask range that meets our best estimate of fair value. For offsetting positions in the same financial instrument, the same price within the bid-ask spread is used to measure both the long and short positions.

For financial instruments that do not have readily determinable fair values using quoted market prices, the determination of fair value is based upon consideration of available information, including types of financial instruments, current financial information, restrictions on dispositions, fair values of underlying financial instruments and quotations for similar instruments. The valuation process for financial instruments may include the use of valuation models and other techniques. Adjustments to valuations (such as counterparty, credit, concentration or liquidity) derived from valuation models may be made when, in management’s judgment, either the size of the position in the financial instrument in a nonactive market or other features of the financial instrument such as its complexity, or the market in which the financial instrument is traded require that an adjustment be made to the value derived from the models. An adjustment may be made if a financial instrument is subject to sales restrictions that would result in a price less than the quoted market price. Adjustments from the price derived from a valuation model reflect management’s judgment that other participants in the market for the financial instrument being measured at fair

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value would also consider in valuing that same financial instrument and are adjusted for assumptions about risk uncertainties and market conditions. Results from valuation models and valuation techniques in one period may not be indicative of future period fair value measurements.

See Note 4, Financial Instruments, for a description of valuation techniques applied to the classes of financial instruments at fair value.

Investments in Managed Funds

Investments in managed funds include our investments in funds managed by us and our investments in related-party managed funds in which we are entitled to a portion of the management and/or performance fees. Investments in nonconsolidated managed funds are accounted for on the equity method or fair value. Gains or losses on our investments in managed funds are included in Asset management fees and investment income from managed funds in the Consolidated Statements of Earnings.

Other Investments

Other investments includes investments and loans entered into where we exercise significant influence over operating and capital decisions in private equity and other operating entities in connection with our capital market activities and loans issued in connection with such activities. Other investments are accounted for on the equity method or at cost, as appropriate. Revenues on Other investments are included in Other income in the Consolidated Statement of Earnings.

Receivable from, and Payable to, Customers

Receivable from and payable to customers includes amounts receivable and payable on cash and margin transactions. Securities owned by customers and held as collateral for these receivables are not reflected in the accompanying consolidated financial statements. Receivable from officers and directors included within this financial statement line item represents balances arising from their individual security transactions. These transactions are subject to the same regulations as customer transactions and are provided on substantially the same terms.

Securities Borrowed and Securities Loaned

Securities borrowed and securities loaned are carried at the amounts of cash collateral advanced and received in connection with the transactions and accounted for as collateralized financing transactions. In connection with both trading and brokerage activities, we borrow securities to cover short sales and to complete transactions in which customers have failed to deliver securities by the required settlement date, and lend securities to other brokers and dealers for similar purposes. We have an active securities borrowed and lending matched book business in which we borrow securities from one party and lend them to another party. When we borrow securities, we generally provide cash to the lender as collateral, which is reflected in our Consolidated Statements of Financial Condition as Securities borrowed. We earn interest revenues on this cash collateral. Similarly, when we lend securities to another party, that party provides cash to us as collateral, which is reflected in our Consolidated Statements of Financial Condition as Securities loaned. We pay interest expense on the cash collateral received from the party borrowing the securities. The initial collateral advanced or received approximates or is greater than the fair value of the securities borrowed or loaned. We monitor the fair value of the securities borrowed and loaned on a daily basis and request additional collateral or return excess collateral, as appropriate.

Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase

Securities purchased under agreements to resell and Securities sold under agreements to repurchase (collectively “repos”) are accounted for as collateralized financing transactions and are recorded at their contracted repurchase amount. We earn and incur interest from this activity which is reflected in our Consolidated Statements of Earnings. We monitor the fair value of the underlying securities daily versus the related receivable or payable balances. Should

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the fair value of the underlying securities decline or increase, additional collateral is requested or excess collateral is returned, as appropriate. We carry repos on a net basis by counterparty when appropriate.

Premises and Equipment

Premises and equipment are depreciated using the straight-line method over the estimated useful lives of the related assets (generally three to ten years). Leasehold improvements are amortized using the straight-line method over the term of the related leases or the estimated useful lives of the assets, whichever is shorter.

Goodwill

At least annually, and more frequently if warranted, we assess whether goodwill has been impaired by comparing the estimated fair value of each reporting unit with its estimated net book value. Periodically estimating the fair value of a reporting unit requires significant judgment and often involves the use of significant estimates and assumptions. These estimates and assumptions could have a significant effect on whether or not an impairment charge is recorded and the magnitude of such a charge. We completed our annual assessment of goodwill as of June 1, 2011 and no impairment was identified. (Refer to Note 9, Acquisitions, for further details on our annual assessment of goodwill.)

Income Taxes

We file a consolidated U.S. federal income tax return, which includes all of our qualifying subsidiaries. We also are subject to income tax in various states and municipalities and those foreign jurisdictions in which we operate. Amounts provided for income taxes are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for tax loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income taxes are provided for temporary differences in reporting certain items, principally, share-based compensation, deferred compensation, unrealized gains and losses on investments and tax amortization on intangible assets. The realization of deferred tax assets is assessed and a valuation allowance is recorded to the extent that it is more likely than not that any portion of the deferred tax asset will not be realized.

The tax benefit related to dividends and dividend equivalents paid on nonvested share based payment awards and outstanding equity options is recognized as an increase to Additional paid in capital. These amounts are included in tax benefits for issuance of share-based awards on the Consolidated Statement of Changes in Stockholders’ Equity.

Legal Reserves

In the normal course of business, we have been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with our activities as a global securities and investment banking firm. We are also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding our businesses, certain of which may result in judgments, settlements, fines, penalties or other injunctions.

We recognize a liability for a contingency in Accrued expenses and other liabilities when it is probable that a liability has been incurred and when the amount of loss can be reasonably estimated. When a range of probable loss can be estimated, we accrue the most likely amount of such loss, and if such amount is not determinable, then we accrue the minimum of the range of probable loss. The determination of the outcome and loss estimates requires significant judgment on the part of management.

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(Unaudited)

In many instances, it is not possible to determine whether any loss is probable or even possible or to estimate the amount of any loss or the size of any range of loss. We believe that, in the aggregate, the pending legal actions or proceedings should not have a material adverse effect on our consolidated results of operations, cash flows or financial condition. In addition, we believe that any amount that could be reasonably estimated of potential loss or range of potential loss in excess of what has been provided in the consolidated financial statements is not material.

Share-based Compensation

Share-based awards are measured based on the grant-date fair value of the award and recognized over the period from the service inception date through the date the employee is no longer required to provide service to earn the award. Expected forfeitures are included in determining share-based compensation expense.

Earnings per Common Share

Basic earnings per share (“EPS”) is computed by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding and certain other shares committed to be, but not yet issued. Net earnings available to common shareholders represent net earnings to common shareholders reduced by the allocation of earnings to participating securities. Losses are not allocated to participating securities. Common shares outstanding and certain other shares committed to be, but not yet issued, include restricted stock and restricted stock units for which no future service is required. Diluted EPS is computed by dividing net earnings available to common shareholders plus dividends on dilutive mandatorily redeemable convertible preferred stock by the weighted average number of common shares outstanding and certain other shares committed to be, but not yet issued, plus all dilutive common stock equivalents outstanding during the period.

Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and, therefore, are included in the earnings allocation in computing earnings per share under the two-class method of earning per share. We grant restricted stock and restricted stock units as part of our share-based compensation that contain nonforfeitable rights to dividends and dividend equivalents, respectively, and therefore, prior to the requisite service being rendered for the right to retain the award, restricted stock and restricted stock units meet the definition of a participating security. As such, we calculate Basic and Diluted earnings per share under the two-class method.

Securitization Activities

We engage in securitization activities related to commercial mortgage loans and mortgage-backed and other asset-backed securities. Such transfers of financial assets are generally accounted for as sales when we have relinquished control over the transferred assets. The gain or loss on sale of such financial assets depends, in part, on the previous carrying amount of the assets involved in the transfer allocated between the assets sold and the retained interests, if any, based upon their respective fair values at the date of sale. We may retain interests in the securitized financial assets as one or more tranches of the securitization. These retained interests are included within Financial instruments owned in the Consolidated Statement of Financial Condition at fair value. Any changes in the fair value of such retained interests are recognized within Principal transactions revenues in the Consolidated Statement of Earnings.

When a transfer of assets does not meet the criteria of a sale, that transfer is treated as a secured borrowing. We continue to recognize the assets of a secured borrowing in Financial instruments owned and recognize the associated financing in Other liabilities in the Consolidated Statements of Financial Condition.

New Accounting Developments

Fair Value Measurements and Disclosures. In May 2011, the Financial Accounting Standards Board (“FASB”) issued accounting updates to ASC 820, Fair Value Measurements Topic — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which provide clarifying guidance on how to

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measure fair value and additional disclosure requirements. The amendments prohibit the use of blockage factors at all levels of the fair value hierarchy and provide guidance on measuring financial instruments that are managed on a net portfolio basis. Additional disclosure requirements include transfers between Levels 1 and 2; and for Level 3 fair value measurements, a description of our valuation processes and additional information about unobservable inputs impacting Level 3 measurements. The updates are effective March 1, 2012 and will be applied prospectively. We are currently evaluating the impact, if any, that these updates will have on our financial condition, results of operations or cash flows.

Reconsideration of Effective Control for Repurchase Agreements. In April 2011, the FASB issued accounting guidance that removes the requirement to consider whether sufficient collateral is held when determining whether to account for repurchase agreements and other agreements that both entitle and obligate the transferor to repurchase or redeem financial assets before their maturity as sales or as secured financings. The guidance is effective prospectively for transactions beginning on January 1, 2012. We do not believe that the adoption of this guidance will have an impact on our financial condition, results of operations or cash flows.

Note 3. Cash, Cash Equivalents and Short-Term Investments

We generally invest our excess cash in money market funds and other short-term investments. Cash equivalents include highly liquid investments not held for resale with original maturities of three months or less. The following are financial instruments that are cash and cash equivalents that are deemed by us to be generally readily convertible into cash as of May 31, 2011 and November 30, 2010 (in thousands):

		May 31,				November 30,
		2011				2010
Cash and cash equivalents:
Cash in banks		$	373,429			$	325,227
Money market investments			2,125,308				1,863,771
Total cash and cash equivalents		$	2,498,737			$	2,188,998
Cash and securities segregated (1)		$	1,219,917			$	1,636,755

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Note 4. Financial Instruments

The following is a summary of our financial assets and liabilities that are accounted for at fair value on a recurring basis as of May 31, 2011 and November 30, 2010 by level within the fair value hierarchy (in thousands):

		As of May 31, 2011
														Counterparty
														and Cash
														Collateral
		Level 1 (3)				Level 2 (3)				Level 3				Netting (2)				Total
Assets:
Financial instruments owned:
Corporate equity securities		$	1,529,938			$	165,257			$	18,230			$	—			$	1,713,425
Corporate debt securities			17,270				4,376,238				39,688				—				4,433,196
Collateralized debt obligations			—				94,366				84,046				—				178,412
U.S. government and federal agency securities			1,721,513				270,233				—				—				1,991,746
Municipal securities			—				497,145				858				—				498,003
Sovereign obligations			2,036,048				1,091,901				—				—				3,127,949
Residential mortgage-backed securities			—				4,066,322				206,721				—				4,273,043
Commercial mortgage-backed securities			—				580,571				33,516				—				614,087
Other asset-backed securities			—				112,221				9,352				—				121,573
Loans and other receivables			—				347,937				261,056				—				608,993
Derivatives			234,656				277,979				102				(376,353	)			136,384
Investments at fair value			—				25				71,008				—				71,033
Total financial instruments owned		$	5,539,425			$	11,880,195				724,577			$	(376,353	)		$	17,767,844
Level 3 assets for which the firm does not bear economic exposure (1)											(192,001	)
Level 3 assets for which the firm bears economic exposure										$	532,576
Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities		$	1,668,580			$	135,373			$	38			$	—			$	1,803,991
Corporate debt securities			9,358				2,277,802				—				—				2,287,160
U.S. government and federal agency securities			3,893,234				2,598				—				—				3,895,832
Municipal securities			—				551				—				—				551
Sovereign obligations			2,046,285				1,114,053				—				—				3,160,338
Residential mortgage-backed securities			—				38,149				—				—				38,149
Other asset-backed securities			—				86				—				—				86
Loans			—				159,352				6,398				—				165,750
Derivatives			229,944				333,752				2,841				(455,131	)			111,406
Total financial instruments sold, not yet purchased		$	7,847,401			$	4,061,716			$	9,277			$	(455,131	)		$	11,463,263

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		As of November 30, 2010
														Counterparty
														and Cash
														Collateral
		Level 1				Level 2				Level 3				Netting (2)				Total
Assets:
Financial instruments owned:
Corporate equity securities		$	1,453,744			$	89,430			$	22,619			$	—			$	1,565,793
Corporate debt securities			25				3,557,183				73,408				—				3,630,616
Collateralized debt obligations			—				27,863				31,121				—				58,984
U.S. government and federal agency securities			2,322,204				210,422				—				—				2,532,626
Municipal securities			—				477,462				472				—				477,934
Sovereign obligations			1,600,762				580,651				—				—				2,181,413
Residential mortgage-backed securities			—				3,912,708				132,359				—				4,045,067
Commercial mortgage-backed securities			—				524,614				6,004				—				530,618
Other asset-backed securities			—				286,329				567				—				286,896
Loans and other receivables			—				206,977				227,596				—				434,573
Derivatives			279,811				176,069				—				(336,612	)			119,268
Investments at fair value			—				—				77,784				—				77,784
Total financial instruments owned		$	5,656,546			$	10,049,708				571,930			$	(336,612	)		$	15,941,572
Level 3 assets for which the firm does not bear economic exposure (1)											(204,139	)
Level 3 assets for which the firm bears economic exposure										$	367,791
Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities		$	1,554,489			$	83,845			$	38			$	—			$	1,638,372
Corporate debt securities			—				2,375,925				—				—				2,375,925
U.S. government and federal agency securities			1,688,684				51,604				—				—				1,740,288
Municipal securities			—				170				—				—				170
Sovereign obligations			2,180,667				814,163				—				—				2,994,830
Residential mortgage-backed securities			—				127,547				—				—				127,547
Commerical mortgage-backed securities			—				1,837				—				—				1,837
Loans			—				124,050				47,228				—				171,278
Derivatives			241,860				240,866				2,346				(425,520	)			59,552
Total financial instruments sold, not yet purchased		$	5,665,700			$	3,820,007			$	49,612			$	(425,520	)		$	9,109,799

We elected to apply the fair value option to loans and loan commitments made in connection with our investment banking and sales and trading activities and certain investments held by subsidiaries that are not registered broker-dealers. Loans and investments at fair value are included in Financial instruments owned and loan commitments are included in Financial instruments sold, not yet purchased — Derivatives on the Consolidated Statements of Financial Condition. The fair value option was elected for loans and loan commitments and investments held by subsidiaries

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that are not registered broker-dealers because they are risk managed by us on a fair value basis. We have elected to apply the fair value option to certain secured financings that arise in connection with our securitization activities. At May 31, 2011 and November 30, 2010, $104.8 million and $85.7 million, respectively, in secured financings, are included within Other liabilities on the Consolidated Statement of Financial Position, are accounted for at fair value and are classified as Level 3 liabilities. Cash and cash equivalents, the cash component of Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations, Receivables — Brokers, dealers and clearing organizations, Receivables — Customers, Receivables — Fees, interest and other, Payables — Brokers, dealers and clearing organizations and Payables — Customers, are not accounted for at fair value; however, the recorded amounts approximate fair value due to their liquid or short-term nature.

The following is a description of the valuation basis, including valuation techniques and inputs, used in measuring our financial assets and liabilities that are accounted for at fair value on a recurring basis:

Corporate Equity Securities

•

Exchange Traded Equity Securities: Exchange-traded equity securities are measured based on quoted exchange prices, which are generally obtained from pricing services, and are categorized as Level 1 in the fair value hierarchy.

•

Non-exchange Traded Equity Securities: Non-exchange traded equity securities are measured primarily using broker quotations, pricing service data from external providers and prices observed for recently executed market transactions and are categorized within Level 2 of the fair value hierarchy. Where such information is not available, non-exchange traded equity securities are categorized as Level 3 financial instruments and measured using valuation techniques involving quoted prices of or market data for comparable companies, similar company ratios and multiples (e.g., price/EBITDA, price/book value), discounted cash flow analyses and transaction prices observed for subsequent financing or capital issuance by the company. When using pricing data of comparable companies, judgment must be applied to adjust the pricing data to account for differences between the measured security and the comparable security (e.g., issuer market capitalization, yield, dividend rate, geographical concentration).

•

Equity warrants: Non-exchange traded equity warrants are generally classified within Level 3 of the fair value hierarchy and are measured using the Black-Scholes model with key inputs impacting the valuation including the underlying security price, implied volatility, dividend yield, interest rate curve, strike price and maturity date.

Corporate Debt Securities

•		Corporate Bonds: Corporate bonds are measured primarily using broker quotations and pricing service data from external providers, where available, prices observed for recently executed market transactions of comparable size, and bond spreads or credit default swap spreads of the issuer adjusted for basis differences between the swap curve and the bond curve. Corporate bonds measured using these valuation methods are categorized within Level 2 of the fair value hierarchy. If broker quotes, pricing data or spread data is not available, alternative valuation techniques are used including cash flow models incorporating interest rate curves, single name or index credit default swap curves for comparable issuers and recovery rate assumptions. Corporate bonds measured using alternative valuation techniques are classified within Level 3 of the fair value hierarchy and comprise a limited portion of our corporate bonds.
•		High Yield Corporate and Convertible Bonds: A significant portion of our high yield corporate and convertible bonds are classified within Level 2 of the fair value hierarchy and are measured primarily using broker quotations and pricing service data from external providers, where available, and prices observed for recently executed market transactions of comparable size. Where pricing data is less observable, valuations are classified in Level 3 and are based on pending transactions involving the issuer or comparable issuers, prices implied from an issuer’s subsequent financings or recapitalizations, models incorporating financial ratios and projected cash flows of the issuer and market prices for comparable issuers.
•		Auction Rate Securities: Auction rate securities (“ARS”) included within corporate debt securities include ARS backed by pools of student loans and auction rate preferred securities issued by closed end mutual funds. ARS

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are measured using market data provided by external service providers, as available. The fair value of ARS is also determined by benchmarking to independent market data and adjusting for projected cash flows, level of seniority in the capital structure, leverage, liquidity and credit rating, as appropriate. ARS are classified within Level 3 of the fair value hierarchy based on our assessment of the transparency of the external market data received.

Collateralized Debt Obligations

Collateralized debt obligations measured using prices observed for recently executed market transactions are classified within Level 2 of the fair value hierarchy. When measured based on valuations received from third party brokers, collateralized debt obligations are classified within Level 3 due to the unobservable nature of the pricing inputs underlying the broker valuations.

U.S. Government and Federal Agency Securities

•

U.S. Treasury Securities: U.S. Treasury securities are measured based on quoted market prices and categorized in Level 1 of the fair value hierarchy.

•

U.S. Agency Issued Debt Securities: Callable and non-callable U.S. agency issued debt securities are measured primarily based on quoted market prices obtained from external pricing services. Non-callable U.S. agency securities are generally classified within Level 1 of the fair value hierarchy and callable U.S. agency securities are classified within Level 2.

Municipal Securities

Municipal securities are measured based on quoted prices obtained from external data providers and generally classified within Level 2 of the fair value hierarchy.

Sovereign Obligations

•

G-7 Government and non-G-7 Government Bonds: G-7 government and non-G-7 government bonds are measured based on quoted market prices obtained from external pricing services. G-7 government bonds are categorized within Level 1 of the fair value hierarchy and non-G-7 government bonds are categorized within Level 2.

•

Emerging Market Sovereign Debt Securities: Valuations are primarily based on market price quotations from external data providers, where available, or recently executed independent transactions of comparable size. To the extent market price quotations are not available or recent transactions have not been observed, valuation techniques incorporating foreign currency curves, interest rate yield curves and country spreads for bonds of similar issuers, seniority and maturity are used to determine fair value. Emerging market sovereign debt securities are generally classified within Level 2 of the fair value hierarchy.

Residential Mortgage-Backed Securities

•

Agency Residential Mortgage-Backed Securities: Agency residential mortgage-backed securities include mortgage pass-through securities (fixed and adjustable rate), collateralized mortgage obligations, interest-only and principal-only securities and to-be-announced securities and are generally measured using market price quotations from external data providers and categorized within Level 2 of the fair value hierarchy.

•

Agency Residential Inverse Interest-Only Securities (“Agency Inverse IOs”): The fair value of agency inverse IOs is estimated using expected future cash flow techniques that incorporate prepayment models and other prepayment assumptions to amortize the underlying mortgage loan collateral. We use prices observed for recently executed transactions to develop market-clearing spread and yield curve assumptions. Valuation inputs with regard to underlying collateral incorporate weighted average coupon, loan-to-value, credit scores, geographic location, maximum and average loan size, originator, servicer, and weighted average loan age. Agency inverse

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IOs are categorized within Level 2 of the fair value hierarchy. We also use vendor data in developing assumptions, as appropriate.

•

Non-Agency Residential Mortgage-Backed Securities: Fair values are determined primarily using discounted cash flow methodologies and securities are categorized within Level 2 or Level 3 of the fair value hierarchy based on the observability of the pricing inputs used. Performance attributes of the underlying mortgage loans are evaluated to estimate pricing inputs, such as prepayment rates, default rates and the severity of credit losses. Attributes of the underlying mortgage loans that affect the pricing inputs include, but are not limited to, weighted average coupon; average and maximum loan size; loan-to-value; credit scores; documentation type; geographic location; weighted average loan age; originator; servicer; historical prepayment, default and loss severity experience of the mortgage loan pool; and delinquency rate. Yield curves used in the discounted cash flow models are based on observed market prices for comparable securities and published interest rate data to estimate market yields.

Commercial Mortgage-Backed Securities

•

Agency Commercial Mortgage-Backed Securities: GNMA project loan bonds and FNMA DUS mortgage-backed securities are generally measured by using prices observed for recently executed market transactions to estimate market-clearing spread levels for purposes of estimating fair value. GNMA project loan bonds and FNMA DUS mortgage-backed securities are categorized within Level 2 of the fair value hierarchy.

•

Non-Agency Commercial Mortgage-Backed Securities: Non-agency commercial mortgage-backed securities are measured using pricing data obtained from third party services and prices observed for recently executed market transactions and are categorized within Level 2 and Level 3 of the fair value hierarchy.

Other Asset-Backed Securities

Other asset-backed securities include, but are not limited to, securities backed by auto loans, credit card receivables and student loans and are categorized within Level 2 of the fair value hierarchy. Valuations are determined using pricing data obtained from third party services and prices observed for recently executed market transactions.

Loans and Other Receivables

•

Corporate Loans: Corporate loans categorized within Level 2 of the fair value hierarchy are measured based on market price quotations from external data providers where sufficient observability exists as to the extent of market transaction data supporting the pricing data. Corporate loans categorized within Level 3 are measured based on market price quotations that are considered to be less transparent, market prices for debt securities of the same creditor, and estimates of future cash flow incorporating assumptions regarding creditor default and recovery rates and consideration of the issuer’s capital structure.

•

Participation Certificates in GNMA Project and Construction Loans: Valuations of participation certificates in GNMA project and construction loans are based on observed market prices of recently executed purchases of similar loans which are then used to derive a market implied spread. The market implied spread is used as the primary input in estimating the fair value of loans at the measurement date. The loan participation certificates are categorized within Level 2 of the fair value hierarchy given the observability and volume of recently executed transactions.

•

Project Loans: Valuation of project loans are based on bench marks of prices for recently executed transactions of related realized collateralized securities and are classified within Level 3 of the fair value hierarchy.

•

Escrow and Trade Claim Receivables: Escrow and trade claim receivables are categorized within Level 3 of the fair value hierarchy where fair value is estimated based on reference to market prices and implied yields of debt securities of the same or similar issuers. Escrow and trade claim receivables are categorized within Level 2 where fair value is based on recent trade activity in the same security.

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Derivatives

•

Listed Derivative Contracts: Listed derivative contracts are measured based on quoted exchange prices, which are generally obtained from pricing services, and are categorized as Level 1 in the fair value hierarchy.

•		OTC Derivative Contracts: OTC derivative contracts are generally valued using models, whose inputs reflect assumptions that we believe market participants would use in valuing the derivative in a current period transaction. Inputs to valuation models are appropriately calibrated to market data. For many OTC derivative contracts, the valuation models do not involve material subjectivity as the methodologies do not entail significant judgment and the inputs to valuation models do not involve a high degree of subjectivity as the valuation model inputs are readily observable or can be derived from actively quoted markets. OTC derivative contracts are primarily categorized in Level 2 of the fair value hierarchy given the observability of the inputs to the valuation models.
		OTC options include OTC equity and commodity options measured using Black-Scholes models with key inputs impacting the valuation including the underlying security or commodity price, implied volatility, dividend yield, interest rate curve, strike price and maturity date. Discounted cash flow models are utilized to measure certain OTC derivative contracts including the valuations of our interest rate swaps, which incorporate observable inputs related to interest rate curves, and valuations of our foreign exchange forwards and swaps, which incorporate observable inputs related to foreign currency spot rates and forward curves. Credit defaults swaps include both index and single-name credit default swaps. External prices are available as inputs in measuring index credit default swaps and single-name credit default swaps. For commodity and equity total return swaps, market prices are observable for the underlying asset and used as the basis for measuring the fair value of the derivative contracts. Total return swaps executed on other underlyings are measured based on valuations received from third parties.

Investments at Fair Value

Investments at fair value include primarily investments in hedge funds, fund of funds and private equity funds, which are measured based on the net asset value of the funds provided by the fund managers and categorized within Level 3 of the fair value hierarchy. Additionally, investments at fair value include direct equity investments in private companies, which are measured using valuation techniques involving quoted prices of or market data for comparable companies, similar company ratios and multiples (e.g., price/EBITDA, price/book value), discounted cash flow analyses and transaction prices observed for subsequent financing or capital issuance by the company. Direct equity investments in private companies are categorized within Level 3 of the fair value hierarchy. The following tables provide further information about our investments in entities that have the characteristics of an investment company at May 31, 2011 and November 30, 2010 (in thousands):

		May 31, 2011
						Unfunded				Redemption Frequency
		Fair Value (f)				Commitments				(if currently eligible)
Equity Long/Short Hedge Funds (a)		$	18,283			$	—			Quarterly, Semiannually
High Yield Hedge Funds(b)			1,064				—			—
Fund of Funds(c)			942				129			Annually
Private Equity Funds(d)			23,726				6,303			—
Other Investments(e)			—				—			At Will
Total(g)		$	44,015			$	6,432

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		November 30, 2010
						Unfunded				Redemption Frequency
		Fair Value (f)				Commitments				(if currently eligible)
Equity Long/Short Hedge Funds (a)		$	19,865			$	—			Quarterly, Semiannually
High Yield Hedge Funds(b)			1,561				—			—
Fund of Funds(c)			2,622				131			Annually
Private Equity Funds(d)			26,567				6,792			—
Other Investments(e)			287				—			At Will
Total(g)		$	50,902			$	6,923

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At May 31, 2011 and November 30, 2010, our Financial instruments owned and Financial instruments sold, not yet purchased are measured using different valuation basis as follows:

		May 31, 2011								November 30, 2010
						Financial								Financial
		Financial				Instruments Sold,				Financial				Instruments Sold,
		Instruments				Not Yet				Instruments				Not Yet
		Owned				Purchased				Owned				Purchased
Exchange closing prices			9	%			14	%			9	%			17	%
Recently observed transaction prices			1	%			2	%			5	%			2	%
Data providers/pricing services			78	%			81	%			65	%			60	%
Broker quotes			2	%			1	%			12	%			19	%
Valuation techniques			10	%			2	%			9	%			2	%
			100	%			100	%			100	%			100	%

Pricing information obtained from external data providers may incorporate a range of market quotes from dealers, recent market transactions and benchmarking model derived prices to quoted market prices and trade data for comparable securities. External pricing data is subject to evaluation for reasonableness using a variety of means including comparisons of prices to those of similar product types, quality and maturities, consideration of the narrowness or wideness of the range of prices obtained, knowledge of recent market transactions and an assessment of the similarity in prices to comparable dealer offerings in a recent time period.

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The following is a summary of changes in fair value of our financial assets and liabilities that have been classified as Level 3 for the three months ended May 31, 2011 (in thousands):

		Three Months Ended May 31, 2011
						Total gains/				Purchases,																Change in
						losses				sales,																unrealized gains/
		Balance,				(realized and				settlements,				Transfers				Transfers				Balance,				(losses) relating to
		February 28,				unrealized)				and issuances,				into				out of				May 31,				instruments still held
		2011				(1)				net				Level 3				Level 3				2011				at May 31, 2011 (1)
Assets:
Financial instruments owned:
Corporate equity securities		$	33,281			$	(489	)		$	2,392			$	—			$	(16,954	)		$	18,230			$	(864	)
Corporate debt securities			74,984				690				(35,257	)			1,681				(2,410	)			39,688				(135	)
Collateralized debt obligations			102,946				9,943				(25,237	)			5,154				(8,760	)			84,046				4,875
U.S. issued municipal securities			799				59				—				—				—				858				59
Residential mortgage-backed securities			97,109				(2,783	)			(787	)			113,366				(184	)			206,721				(6,303	)
Commercial mortgage-backed securities			6,301				5,013				5,532				22,971				(6,301	)			33,516				5,013
Other asset-backed securities			11,452				(118	)			(4,675	)			5,871				(3,178	)			9,352				75
Loans and other receivables			217,751				5,052				47,210				1,896				(10,853	)			261,056				3,904
Investments at fair value			67,834				7,727				(4,534	)			—				(19	)			71,008				7,740
Liabilities:
Financial instruments sold, not yet purchased:
Corporate equity securities		$	38			$	—			$	—			$	—			$	—			$	38			$	—
Net derivatives (2)			4,957				(2,218	)			—				—				—				2,739				(2,118	)
Loans			17,776				(21	)			(11,357	)			—				—				6,398				—