The Quarterly
LUK Q3 2016 10-Q

Leucadia National Corp (LUK) SEC Annual Report (10-K) for 2016

LUK Q1 2017 10-Q
LUK Q3 2016 10-Q LUK Q1 2017 10-Q



SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

______________________

FORM 10-K

x

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

                                                               For the fiscal year ended December 31, 2016

or

¨

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

For the transition period from ___________ to ___________

Commission file number:  1-5721

LEUCADIA NATIONAL CORPORATION

(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 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  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, 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. (Check one):

Large accelerated filer x

Accelerated filer ¨

Non-accelerated filer   ¨

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  ¨   No  x

Aggregate market value of the voting stock of the registrant held by non-affiliates of the registrant at June 30, 2016 (computed by reference to the last reported closing sale price of the Common Shares on the New York Stock Exchange on such date):  $5,757,059,412.

On February 16, 2017, the registrant had outstanding 359,807,465 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 2016 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 67.


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PART I

Item 1 .

Business .

Overview

Leucadia National Corporation ("Leucadia" or the "Company") is a diversified holding company focused on long-term value creation to maximize shareholder value. Our financial services businesses include Jefferies (investment banking and capital markets), Leucadia Asset Management (asset management), Berkadia (commercial mortgage banking, investment sales and servicing), FXCM (provider of online foreign exchange trading services), HomeFed (a publicly traded real estate company) and Foursight Capital (vehicle finance).  We also own and have investments in a diverse array of other businesses, including National Beef (beef processing), HRG Group (insurance and consumer products), Vitesse Energy and Juneau Energy (oil and gas exploration and development), Garcadia (automobile dealerships), Linkem (fixed wireless broadband services in Italy), Idaho Timber (manufacturing), and Golden Queen (gold and silver mining project).  The structure of each of our investments was tailored to the unique opportunity each transaction presented.  Our 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 continuously review acquisitions of businesses, securities and assets that have the potential for significant long-term value creation, invest in a broad array of businesses, and periodically evaluate the retention and disposition of one or more of our existing businesses and investments.  Changes in the mix of our businesses and investments should be expected.

At December 31, 2016 , we and our investee companies had approximately 36,000 full-time employees, of which approximately 13,000 were full-time employees of Leucadia and our consolidated subsidiaries.

Our executive offices are located at 520 Madison Avenue, New York, NY 10022, as is the global headquarters of Jefferies, our largest subsidiary in terms of invested capital.  Our primary telephone number is (212) 460-1900 and our website address is www.leucadia.com .

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

In January 2017, we sold 100% of Conwed Plastics ("Conwed") to Schweitzer-Mauduit International, Inc., (NYSE:SWM) for $295 million in cash plus potential earn-out payments over five years of up to $40 million in cash to the extent the results of Conwed's subsidiary, Filtrexx International, exceed certain performance thresholds. At December 31, 2016, the net book value of our investment in Conwed was $100.6 million. The pre-tax gain of approximately $180 million recognized upon closing will be reflected in our results of operations for the three months ended March 31, 2017.

Also in January 2017, we participated in a preferred equity financing for Linkem. Existing shareholders, along with funds managed by BlackRock, invested €100 million in cash in exchange for shares of Linkem to fund future expansion plans, of which Leucadia's share was €30 million. The financing was based on a pre-money valuation of €700 million (post-money valuation of €800 million) and our fully-diluted ownership post-transaction is 53%.

In September 2016, we completed the previously announced restructuring of our investment in FXCM Group, LLC ("FXCM"), in which we converted our participation rights to a direct equity interest in the operating business, agreed to shared board oversight, modified the loan terms to allow more time to optimize remaining asset sales, and adopted a long-term incentive plan for senior management. In accordance with this agreement, as of December 31, 2016, we have a 49.9% membership interest in FXCM and up to 65% of all distributions; we have appointed three directors from Leucadia and three have been appointed by FXCM Holdings, LLC ("FXCM Holdings"); the outstanding balance of the term loan, due January 2018, is $154.5 million; and FXCM has adopted a long-term incentive bonus plan, which is designed to incentivize FXCM senior management to maximize cash flow generation and the growth of the business.




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Financial Services Businesses

The following provides more information about each of our financial services businesses and investments and our ownership percentages:

Jefferies, 100% (investment banking & capital markets);

Leucadia Asset Management, various (asset management);

FXCM, 49.9% (online foreign exchange trading);

HomeFed, 65% (45% voting) (real estate);

Berkadia, 50% (commercial mortgage banking, investment sales and servicing); and

Foursight Capital, 100% (vehicle finance).

Jefferies

Jefferies is a global full-service, integrated securities and investment banking firm. Jefferies 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. On March 1, 2013, Jefferies Group, Inc. converted into a limited liability company (renamed Jefferies Group LLC) and became an indirect wholly owned subsidiary of Leucadia National Corporation. Following the merger, Jefferies Group LLC retains a credit rating separate from Leucadia and remains an SEC reporting company, filing annual, quarterly and periodic financial reports.  As of November 30, 2016, Jefferies had 3,329 employees in the Americas, Europe, the Middle East and Asia. The net book value (assets less liabilities and noncontrolling interests) of our investment in Jefferies was $5.4 billion at December 31, 2016 .

Equities

Equities Research, Sales and Trading

Jefferies provides its clients full-service equities research, sales and trading capabilities across global securities markets. Jefferies 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 equity research, sales and trading efforts are organized across three geographical regions: the Americas; Europe and the Middle East and Africa ("EMEA"); and Asia Pacific. Jefferies main product lines within the regions are cash equities, electronic trading, equity derivatives and convertibles. Jefferies clients are primarily institutional market participants such as mutual funds, hedge funds, investment advisors, pension and profit sharing plans, and insurance companies. Through its global research team and sales force, Jefferies 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 equity research covers over 2,000 companies around the world and a further nearly 700 companies are covered by nine leading local firms in Asia Pacific with whom Jefferies maintains alliances.

Equity Finance

Jefferies Equity Finance business provides financing, securities lending and other prime brokerage services. Jefferies offers prime brokerage services in the U.S. that provide hedge funds, money managers and registered investment advisors with execution, financing, clearing, reporting and administrative services. Jefferies finances its clients' securities positions through margin loans that are collateralized by securities, cash or other acceptable liquid collateral. Jefferies earns an interest spread equal to the difference between the amount Jefferies pays for funds and the amount Jefferies receives from its clients. Jefferies also operates a matched book in equity and corporate bond securities, whereby Jefferies borrows and lends securities versus cash or liquid collateral and earns a net interest spread. Jefferies 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 directly provides its clients with all customary prime brokerage services.


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Wealth Management

Jefferies 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 advisors provide access to all of its institutional execution capabilities and delivers other financial services. Jefferies 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 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, high yield and distressed securities, emerging markets debt, interest rate derivative products, as well as foreign exchange trade execution. Jefferies 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 acts as an intermediary between borrowers and lenders of short-term funds and obtains funding for various of its inventory positions. Jefferies 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 strategists and economists provide ongoing commentary and analysis of the global fixed income markets. In addition, Jefferies fixed income desk strategists provide ideas and analysis across a variety of fixed income products.

Futures

In April 2015, Jefferies entered into a definitive agreement to transfer certain of its futures activities to Société Générale S.A. That transaction closed in the second quarter of 2015 and Jefferies completed the exit of its Futures business during the second quarter of 2016.

Investment Banking

Jefferies provides its clients around the world with a full range of equity capital markets, debt capital markets and financial advisory services. Jefferies services are enhanced by its industry expertise, its global distribution capabilities and its senior level commitment to its clients.

Approximately 760 investment banking professionals operate in the Americas, Europe and Asia, and are organized into industry, product and geographic coverage groups. Jefferies industry coverage groups include Consumer & Retail; Energy; Financial Institutions; Healthcare; Industrials; Real Estate; Gaming & Lodging; Technology; Media and Telecommunications; Financial Sponsors; and Public Finance. Jefferies product coverage groups include equity capital markets; debt capital markets; and advisory, which includes both mergers and acquisitions and restructuring and recapitalization expertise. Jefferies geographic coverage groups include coverage teams based in major cities in the United States, Toronto, London, Frankfurt, Paris, Milan, Stockholm, Mumbai, Hong Kong, Singapore and Dubai.

Equity Capital Markets

Jefferies 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 provides a wide range of debt and acquisition financing capabilities for companies, financial sponsors and government entities. Jefferies 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.


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Advisory Services

Jefferies provides mergers and acquisition and restructuring and recapitalization services to companies, financial sponsors and government entities. In the mergers and acquisition area, Jefferies 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 provides to 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.

Asset Management

Jefferies manages and provides services to a diverse group of alternative asset management platforms across a spectrum of investment strategies and asset classes. Jefferies is supporting and developing focused strategies managed by distinct management teams. Strategies currently offered to pension funds, insurance companies, sovereign wealth funds, and other institutional investors through these platforms include systematic quant and global equity event-driven. Jefferies partners with our asset management business in providing asset management services.

Competition

All aspects of Jefferies business are intensely competitive. Jefferies competes primarily with large global bank holding companies that engage in capital markets activities, but also with firms listed in the NYSE Arca Securities Broker/Dealer Index, other brokers and dealers, and investment banking firms. The large global bank holding companies have substantially greater capital and resources than Jefferies does. Jefferies 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 operates is subject to extensive regulation. In the U.S., the Securities and Exchange Commission ("SEC") is the federal agency responsible for the administration of federal securities laws, and the Commodity Futures Trading Commission ("CFTC") is the federal agency responsible for the administration of laws relating to commodity interests (including futures and swaps). In addition, self-regulatory organizations, principally Financial Industry Regulatory Authority ("FINRA") and the National Futures Association ("NFA"), are actively involved in the regulation of financial services businesses. The SEC, CFTC and self-regulatory organizations conduct periodic examinations of broker-dealers, investment advisers, futures commission merchants ("FCMs") and swap dealers. The applicable self-regulatory authority for Jefferies activities as a broker-dealer is FINRA, and the applicable self-regulatory authority for Jefferies FCM activities is the NFA. Financial services businesses are also subject to regulation by state securities commissions and attorneys general in those states in which they do business.

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 of securities firms, anti-money laundering efforts, recordkeeping and the conduct of directors, officers and employees. Registered advisors are subject to, among other requirements, SEC regulations concerning marketing, transactions with affiliates, disclosure to clients, and recordkeeping; and advisors that are also registered as commodity trading advisors or commodity pool operators are also subject to regulation by the CFTC and the NFA. FCMs, introducing brokers and swap dealers that engage in commodities, futures or swap transactions are subject to regulation by the CFTC and the NFA. Additional legislation, changes in rules promulgated by the SEC, CFTC and self-regulatory organizations, or changes in the interpretation or enforcement of existing laws and rules may directly affect the operations and profitability of broker-dealers, investment advisers, FCMs and swap dealers. The SEC, the CFTC and self-regulatory organizations, state securities commissions and state attorneys general may conduct administrative proceedings or initiate civil litigation that can result in censure, fine, suspension, expulsion of a firm, its officers or employees, or revocation of a firm's licenses.

Regulatory Capital Requirements. Several Jefferies entities are subject to financial capital requirements that are set by regulation. Jefferies and Jefferies Execution Services, Inc. ("Jefferies Execution"), are registered broker-dealers and are subject to the SEC's Uniform Net Capital Rule (the "Net Capital Rule"). Jefferies and Jefferies Execution have elected to compute their 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 operations of Jefferies broker-dealers, 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.


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Jefferies is also registered as an FCM and is therefore subject to the minimum financial requirements for FCMs set by the CFTC. Jefferies as an FCM is required to maintain minimum net capital being the greater of $1.0 million or its risk-based capital requirements computed as 8% of the total risk margin requirement for positions carried by the FCM in customer accounts and non-customer accounts. Jefferies, as a dually registered broker-dealer and FCM, is required to maintain net capital in excess of the greater of the SEC or CFTC minimum financial requirements.

Jefferies subsidiaries that are registered swap dealers will become subject to capital requirements under the Dodd-Frank Act once the relevant rules become final. For additional information see Item 1A. Risk Factors.

Jefferies Group LLC 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 26 to our consolidated financial statements for additional discussion of net capital calculations.

Regulation outside the United States. Jefferies 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 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, Hong Kong Securities and Futures Commission, the Japan Financial Services Agency and the Monetary Authority of Singapore. Every country in which Jefferies 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.

Leucadia Asset Management

During 2013, we formed Leucadia Asset Management ("LAM"), a registered investment adviser, through which we are developing focused alternative asset management businesses. As the adviser and/or general partner to various private investment funds or other types of investment vehicles, LAM provides advisory, portfolio management and operational services to accredited investors and/or qualified purchasers. Once an investment vehicle is formed, it is typical that we will be an initial or major investor.  LAM's revenues derive from management fees and/or performance fees based on investment returns generated for the investors, as well as the return on our invested capital. Our strategy is to grow third party assets under management, while earning management fees and a reasonable return on our capital until the capital is returned to us. Our LAM and other asset management strategies primarily include Folger Hill Asset Management LLC ("Folger Hill"), a multi-manager discretionary long/short equity hedge fund platform; Topwater Capital ("Topwater"), a first-loss product; 54 Madison Capital, LLC ("54 Madison"), which invests in real estate projects; CoreCommodity Management, an asset manager that focuses on commodities strategies; Tenacis Capital, a systematic macro investment platform; Lake Hill, an electronic trader in listed options and futures across asset classes; as well as several other smaller businesses.  In addition, several investment management businesses, including Jefferies Strategic Investments Division, operate under Jefferies and are included under our marketing of the LAM platform.

Folger Hill - In August 2014, we and Solomon Kumin established Folger Hill, which is registered as an investment adviser with the SEC. In March 2015, Folger Hill launched a multi-manager hedge fund which included a $400 million seed investment from us. The fund is a multi-manager discretionary long/short equity hedge fund platform that aims to deliver strong positive results with lower volatility and market correlation than typical equity long/short hedge funds. At December 31, 2016 , assets under management totaled approximately $510 million. In January 2017, we invested $75 million in a separate account managed by Folger Hill Asia, which currently has assets under management of $175 million.

Topwater - In August 2013, we launched a "first-loss" product with Bryan Borgia and Travis Taylor. Starting in 2004, Topwater founders pioneered the first-loss model of investing, which offers a unique risk-reward trade-off for investors and a prudent way for hedge fund managers to run a managed account on attractive terms. Topwater is a multi-strategy, multi-manager investment partnership where each underlying investment manager contributes 10% of their own capital as a first-loss layer, shielding Topwater's investors from losses up to 10%. This unique structure provides a strong layer of principal protection. Regulatory assets under management totaled $658 million at December 31, 2016 .

54 Madison - In August 2015, we and a team led by Henry Silverman launched 54 Madison, which manages a fund that provides equity capital for hotel, timeshare, resort, residential and specialty retail real estate development projects in core global markets. We made a capital commitment of $225.0 million to 54 Madison and through December 31, 2016 we have funded $114.9 million. Total fund commitments to 54 Madison from all investors total $500 million.


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Jefferies Strategic Investments Division - The Strategic Investments Division ("SID") of Jefferies Investment Advisors, launched in 2010, provides investment advisory and portfolio management services to institutional clients. SID is a quantitative asset management group utilizing a range of systematic strategies applied to various global markets to create investment products primarily in the absolute return space. Its flagship funds are Jefferies Structured Alpha Fund, Jefferies Managed Futures Fund and the Grouper Market Neutral program. SID manages approximately $1.6 billion assets under management and has a team of forty individuals dedicated to its efforts.

FXCM

FXCM is a leading 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.


In January 2015, we entered into a credit agreement with FXCM, and provided FXCM a two-year senior secured term loan with rights to a variable proportion of certain future distributions. On September 1, 2016 we, FXCM Inc. and FXCM Holdings entered into an agreement that amended the terms of our loan and associated rights. Among other changes, the amendments extended the maturity of the term loan by one year to January 2018 to allow FXCM more time to optimize remaining asset sales ($154.5 million was outstanding under this loan at December 31, 2016 ); gave Leucadia a 49.9% common membership interest in FXCM, and up to 65% of all distributions; created a six-member board for FXCM, comprised of three directors appointed by Leucadia and three directors appointed by FXCM Holdings; put in place a long-term incentive program for FXCM's senior management; entered into a management agreement pursuant to which FXCM Holdings will manage the assets and day-to-day operations of FXCM and its subsidiaries; and gave FXCM Holdings the same right Leucadia has to require a sale of FXCM beginning in January 2018.


During February 2017, FXCM Holdings and FXCM's U.S. subsidiary, Forex Capital Markets LLC ("FXCM U.S.") settled complaints filed by the NFA and the CFTC against FXCM U.S. and certain of its principals relating to matters that occurred between 2010 and 2014. The NFA settlement has no monetary fine and the CFTC settlement has a $7 million fine. As part of the settlements, FXCM U.S. will be withdrawing from business and has agreed to sell FXCM U.S.'s customer accounts to Gain Capital Holdings, Inc. FXCM U.S. generates approximately 20% of FXCM's revenue, but is not currently profitable. The proceeds from any sale of the U.S. accounts, net of closure and severance costs, as well as regulatory capital released after a sale, will be used to pay down the Leucadia term loan. As part of the settlement, Leucadia, FXCM Holdings and FXCM have amended the management and incentive compensation agreements, giving any three directors of the FXCM board the right to terminate management and any unvested incentive compensation at any time.


On February 21, 2017, Drew Niv resigned as the Chief Executive Officer of FXCM, although he will remain in an advisory position. Brendan Callan will become the interim Chief Executive Officer of FXCM and Leucadia's Jimmy Hallac will become Chairman of the Board of FXCM.


In addition, on February 21, 2017, Mr. Niv resigned from his positions as Chief Executive Officer and Chairman of the Board of FXCM Inc., but will remain as acting Chief Executive Officer of FXCM Inc. until his successor is identified. In addition, FXCM Inc. announced that it will be changing its name to Global Brokerage Inc. effective February 27, 2017.


We do not hold any interest in FXCM Inc., the publicly traded company and issuer of senior convertible notes. FXCM Inc. holds an economic interest of 68% in FXCM Holdings, LLC, which in turn holds 50.1% of FXCM Group, LLC. As more fully described above, we own the remaining 49.9% of FXCM Group, LLC, and our senior secured term loan is also with FXCM Group, LLC, which is a holding company for all of FXCM Group, LLC's affiliated operating subsidiaries. Net profits and proceeds generated by these subsidiaries, and from the sales of these subsidiaries, flow first to FXCM Group, LLC, where they are applied to the outstanding balance of our term loan and then, in accordance with the agreement described above, to us and FXCM Holdings, LLC. A portion of the profits and proceeds that flow to FXCM Holdings, LLC then flow to FXCM Inc., in accordance with its economic interest. We refer to FXCM Group, LLC as "FXCM."


Through the amendments on September 1, 2016, our derivative rights were exchanged for a 49.9% common membership interest in FXCM. We gained the ability to significantly influence FXCM through our common membership interest and our seats on the board of directors. As a result, we classify our equity investment in FXCM in our December 31, 2016 Consolidated Statement of Financial Condition as Loans to and investments in associated companies. The term loan is included in our December 31, 2016 Consolidated Statement of Financial Condition as Trading assets. The total amount of our term loan and common membership interest in FXCM at December 31, 2016 is $500.8 million, which is made up of $164.5 million for the term loan and $336.3 million for the common membership interest.


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HomeFed Corporation

HomeFed is 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 65% 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 4.8% of HomeFed is beneficially owned by our Chairman, who also serves as HomeFed's Chairman.  Our President is a Director of HomeFed.

At December 31, 2016 , our investment had a net book value of $269.4 million and we report HomeFed as an equity investment in our financial statements.  HomeFed's strategic priorities vary by project, ranging from pursuing further planning, entitlement and approval, to beginning construction, commencing sales, oversight and management of operating assets, and taking other steps to maximize profits.  HomeFed also continues to look for new opportunities both within, and outside of, the areas where it currently has projects under development.

Berkadia

Berkadia Commercial Mortgage LLC, and its associated entities, is a joint venture formed in 2009 with Berkshire Hathaway. Berkadia is a commercial real estate company providing capital solutions, investment sales advisory and mortgage servicing for multifamily and commercial properties. We and Berkshire Hathaway each have a 50% equity interest in Berkadia.

Berkadia originates commercial real estate loans, primarily in respect of multi-family housing units, for Fannie Mae, Freddie Mac, Ginnie Mae and the FHA using their underwriting guidelines, and will typically sell the loan to such entities shortly after it is funded.  Provided Berkadia adheres to their guidelines, these government-related entities must purchase the loan at the face amount plus accrued interest with Berkadia retaining the mortgage servicing rights.  In addition, as a condition to Fannie Mae's delegation of responsibility for underwriting, originating and servicing of loans, Berkadia assumes a shared loss position throughout the term of each loan sold to Fannie Mae, with a maximum loss percentage of approximately one-third of the original principal balance. During 2016 , Berkadia originated $12.8 billion in Fannie Mae, Freddie Mac, Ginnie Mae and FHA loans.  Berkadia also originates and brokers commercial/multifamily mortgage loans which are not part of the government agency programs.  During 2016 , Berkadia closed $6.4 billion of loans in this capacity for life companies, conduits and other third-parties.

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 ("Bridge loans").  Bridge loans are typically floating rate loans with 1 to 3 year maturities. During 2016 , Berkadia originated $223.3 million of such loans. Berkadia held $452.0 million of Bridge loans on its balance sheet at December 31, 2016 .

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.  During 2016 , Berkadia closed over $7.7 billion in sales transactions.

Berkadia 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 ("CMBS"), banks, insurance companies and other financial institutions.  Berkadia is an approved servicer of loans for Fannie Mae, Freddie Mac, Ginnie Mae and the FHA.  As of December 31, 2016 , Berkadia serviced approximately 20,000 loans with an unpaid principal balance of $224.2 billion.

As a servicer, Berkadia is frequently responsible for managing, on behalf of its investors and borrowers, the balances that are maintained in custodial accounts for the purposes of collecting and distributing principal and interest, and for managing and disbursing various reserve accounts related to the mortgaged properties among other things.  Berkadia derives certain economic benefits from administering these custodial accounts.  Such balances totaled in excess of $5.0 billion as of December 31, 2016 .

Our only capital contribution to Berkadia, in the amount of $217.2 million, was made at the time Berkadia was formed in 2009.  Through December 31, 2016 we have received cumulative cash distributions of $494.6 million.  At December 31, 2016 , the net book value of our investment in Berkadia was $184.4 million, and we report Berkadia as an equity investment in our financial statements.  Berkadia's strategic priorities include continued value creation by growing origination and sales advisory volumes, and expanding servicing engagements with third parties.

Berkadia is required under its servicing agreements to maintain certain minimum servicer ratings or qualifications from the rating agencies.  A downgrade below a certain level may give rise to the right of a customer or trustee of a securitized transaction to


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terminate Berkadia as servicer.  Berkadia currently maintains approvals or ratings from Moody's Investors Service, Fitch Ratings, Standard & Poor's, Morningstar Credit Ratings and Dominion Bond Rating Services.  These ratings currently exceed the minimum ratings required by the related servicing agreements.  Ratings issued by the rating agencies can be withdrawn or lowered at any time.  In addition, Fannie Mae and Freddie Mac retain broad discretion to terminate Berkadia as a seller/servicer without cause.

Foursight Capital

In 2012, we partnered with an experienced management team in the indirect auto finance market to start Foursight Capital, of which we own 100%. Foursight Capital purchases automobile installment contracts originated by franchised and independent dealerships in conjunction with the sale of new and used automobiles and services these loans throughout the life cycle. In 2016 , Foursight originated $250.0 million in auto loans, up from $215.0 million in 2015 . Additionally, Foursight Capital is managing the wind down of the Chrome Capital portfolio, which was refinanced in the fourth quarter of 2016 with a new debt facility. The net book value of our investment in Foursight Capital was $78.7 million at December 31, 2016 .

Merchant Banking

The following provides more information about certain of our other subsidiaries and investments and our ownership percentages, including:

National Beef, 79% (beef processing);

HRG, 23% (insurance and consumer products);

Vitesse Energy, 96% (oil and gas exploration and development);

Juneau Energy, 98% (oil and gas exploration and development);

Garcadia, about 75% (automobile dealerships);

Linkem, 57% fully-diluted (42% voting) (fixed wireless broadband services);

Golden Queen, 35% (a gold and silver mining project); and

Idaho Timber, 100% (manufacturing).

National Beef

National Beef is 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.  Based in Kansas City, Missouri, National Beef had approximately 8,140 employees at December 31, 2016 and generated total revenues of $7.0 billion in 2016 .  We purchased National Beef in 2011 and own 78.9%.

The largest share of National Beef's revenue, about 91%, is generated from the sale of boxed beef products.  National Beef also generates revenues through value-added production with its consumer-ready products.  In addition, National Beef operates one of the largest wet blue tanning facilities in the world (wet blue tanning refers to the first step in processing raw and brine-cured hides into tanned leather), selling processed hides to tanners that produce finished leather for the automotive, luxury goods, apparel and furniture industries.  Other streams of revenue include sales through its subsidiary,  Kansas City Steak Company, LLC, which sells portioned beef and other products directly to consumers through internet, direct mail and direct response television, and service revenues generated by National Carriers, Inc., a wholly owned transportation and logistics company that is one of the largest refrigerated and livestock carrier operations in the U.S. and transports products for National Beef and a variety of other customers. 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 $629.8 million at December 31, 2016 .

Sales and Marketing

National Beef markets its products to national and regional retailers, including supermarket chains, independent grocers, club stores, wholesalers and distributors, food service providers, further processors and the U.S. military.  In addition, National Beef sells beef by-products to the medical, feed processing, fertilizer and pet food industries.  National Beef exports products to more than 20 countries; in 2016 , export sales represented approximately 10.8% of revenues.  The demand for beef is generally strongest in the spring and summer months and generally decreases during the winter months.

National Beef emphasizes the sale of higher-margin, value-added products, which include branded boxed beef, consumer-ready beef and pork, portion control beef and wet blue hides.  National Beef believes its value-added products can command higher prices than commodity products because of National Beef's ability to consistently meet product specifications, based on quality,


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trim, weight, size, breed or other factors, tailored to the needs of its customers.  In addition to the value-added brands that National Beef owns, National Beef licenses the use of Certified Angus Beef ® , a registered trademark of Certified Angus Beef LLC, and Certified Hereford Beef ® , a registered trademark of Certified Hereford Beef LLC.

Raw Materials and Procurement

The primary raw material for the beef processing plants is live cattle. Live cattle prices change daily based on supply and demand for beef and other proteins, cattle inventory levels, weather and other factors.

National Beef has entered into a cattle supply agreement with U.S. Premium Beef, LLC ("USPB"), the current owner of a 15.1% interest in National Beef, which sold a substantial portion of its ownership interest to us.  USPB has agreed to supply, and National Beef has agreed to purchase through USPB from the members of USPB, 735,385 head of cattle per year (subject to adjustment), based on pricing grids furnished by National Beef to USPB.  National Beef believes the pricing grids are based on terms that could be obtained from an unaffiliated party.  During 2016 , National Beef purchased approximately 27.2% of the total cattle it processed from USPB members pursuant to the cattle supply agreement.  National Beef also purchased additional cattle from certain USPB members outside of the cattle supply agreement as well as from hundreds of other cattle suppliers. 

Processing Facilities

National Beef owns two beef processing facilities located in Liberal and Dodge City, Kansas, which can each process approximately 6,000 cattle per day.  National Beef's three consumer-ready facilities are in Hummels Wharf, Pennsylvania, Moultrie, Georgia and Kansas City, Kansas.  National Beef's wet blue tanning facility is in St. Joseph, Missouri.

Competition

Competitive conditions exist both in the purchase of live cattle, as well as in the sale of beef products.  Beef products compete with other protein sources, including pork and poultry, but National Beef's principal competition comes from other beef processors.  National Beef believes the principal competitive factors in the beef processing industry are price, quality, food safety, customer service, product distribution, technological innovations (such as food safety interventions and packaging technologies) and brand loyalty.  Some of National Beef's competitors have substantially larger beef operations, greater financial and other resources and wider brand recognition for their products.

Regulation and Environmental

National Beef's operations are subject to extensive regulation by the U.S. Department of Agriculture ("USDA") including its Food Safety and Inspection Service ("FSIS") and its Grain Inspection, Packers and Stockyards Administration ("GIPSA"), the Food and Drug Administration ("FDA"), the U.S. Environmental Protection Agency ("EPA") and other federal, state, local and foreign authorities regarding the processing, packaging, storage, safety, distribution, advertising and labeling of its products.

National Beef is subject to the Packers and Stockyards Act of 1921 ("PSA").  Among other things, this statute generally requires National Beef to make full payment for livestock purchases not later than the close of business the day after the purchase and transfer of possession or determination of the purchase price.  Under the PSA, National Beef must hold in trust for the benefit of unpaid cash livestock suppliers all receivables, inventory and proceeds derived from National Beef's sale of such cattle until the sellers have received full payment.  In addition, pursuant to PSA rules, at December 31, 2016 , National Beef has obtained from an insurance company a surety bond in the amount of $50.4 million as a measure of protection for livestock sellers.

The Dodge City and Liberal facilities are subject to Title V permitting pursuant to the Federal Clean Air Act and the Kansas Air Quality Act.  The St. Joseph facility is subject to a secondary air permit which is in place.  The Dodge City, Liberal, Hummels Wharf and Moultrie facilities are subject to Clean Air Act Risk Management Plan requirements relating to the use of ammonia as a refrigerant.

All of National Beef's plants are indirect dischargers of wastewater to publicly owned treatment works and are subject to requirements under the federal Clean Water Act, state and municipal laws, as well as agreements or permits with municipal or county authorities.  Upon renewal of these agreements and permits, National Beef is from time to time required to make capital expenditures to upgrade or expand wastewater treatment facilities to address new and more stringent discharge requirements imposed at the time of renewal.  Storm water discharges from National Beef's plants are also regulated by state and local authorities.

All of National Beef's facilities generate solid waste streams including small quantities of hazardous wastes.  National Beef is subject to laws that provide for strict, and in certain circumstances, joint and several liability for remediation of hazardous substances


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at contaminated sites; however, National Beef has not received any demands that it has any liability at sites under the Comprehensive Environmental Response, Compensation and Liability Act ("Superfund") or state counterparts.  All plants are subject to community right to know reporting requirements under the Superfund Amendments and Reauthorization Act of 1986, which requires yearly filings as to the substances used on facility premises.

Employees

Of National Beef's 8,140 employees, approximately 5,325 are represented by collective bargaining agreements.  Approximately 2,625 employees at the Liberal plant are represented by the United Food and Commercial Workers International Union under a collective bargaining agreement scheduled to expire in December 2017, approximately 2,475 employees at the Dodge City plant are represented by the United Food and Commercial Workers International Union under a collective bargaining agreement scheduled to expire in December 2021, and another approximately 225 employees at the St. Joseph plant are represented by the United Cereal Workers (R.W.D.S.U./U.F.C.W.) under a collective bargaining agreement scheduled to expire in June 2019.

HRG Group

HRG Group, Inc. ("HRG") is a publicly traded (NYSE: HRG) holding company that primarily owns approximately 58% of Spectrum Brands, a publicly traded (NYSE: SPB) global consumer products company; an approximately 80% ownership stake in Fidelity & Guaranty Life ("FGL"), a publicly traded (NYSE: FGL) life insurance and annuity products company; and Front Street, a long-term reinsurance company. On November 8, 2015, FGL and Anbang Insurance Group Co., Ltd. ("Anbang") entered into a definitive merger agreement pursuant to which Anbang will acquire FGL for $26.80 per share in cash. In February 2017, FGL and Anbang amended the merger agreement which extends the outside termination date to April 17, 2017. The amendment also gives FGL the right to solicit, respond to, evaluate and negotiate competing offers, but provides that FGL may not sign a competing definitive agreement prior to the termination date.

As of December 31, 2016 , we own 46.6 million common shares of HRG, representing about 23% of its outstanding common shares, which we reflect in our financial results at fair value.  In addition, we have designated two directors on HRG's board, one of whom is our Chairman, who also serves as HRG's Chairman.  At December 31, 2016 , the book value of our holdings in HRG is $725.1 million and our cost was $475.6 million.

Oil and Gas

During May 2014, we formed Vitesse Energy, LLC ("Vitesse"), a non-operating owner of oil and gas properties in the core of the Bakken Shale oil field in North Dakota and Montana and the Denver-Julesburg Basin in Wyoming.  We own 96% of Vitesse, which acquires producing and undeveloped leasehold properties. Vitesse participates in the drilling and completion of lower risk new wells on our leaseholds thereby converting our leaseholds into cash flow producing assets.  Vitesse has acquired approximately 21,000 net acres of Bakken leasehold and has an interest in 1,329 producing wells (35 net wells) and 428 gross wells (15 net wells) that are currently drilling or permitted for drilling. In the third quarter of 2016, Vitesse acquired interests in 31 wellbores, which were drilled but not yet completed, in the Denver-Julesburg Basin. We expect all of those wells to be completed and producing positive cash flow in 2017. Our strategic priorities for Vitesse are to selectively add to our core acreage, participate in future development in our core areas, increase cash flow from new well development, and profitably sell selective assets when appropriate.

During February 2014, we made our first investment in Juneau Energy, LLC ("Juneau"). We own 98% of Juneau. Juneau currently has acreage and producing wells in Brazos County and acreage in Houston and Grimes counties in East Texas. During 2016, the management of Juneau was transferred to the Vitesse team. Juneau subsequently partnered with Lonestar Resources US Inc. (NASDAQ: LONE) ("Lonestar"), an accomplished Eagle Ford operator, and sold 50% of its interest in its two East Eagle Ford wells that Juneau drilled and completed in late 2015 to Lonestar for equity and interests in Lonestar oil and gas properties and invested $25 million in Lonestar in exchange for $25 million principal amount of secured second lien notes and warrants. In addition, Lonestar has agreed to pool and develop Juneau's and its own acreage in the East Eagle Ford. In December 2016, Lonestar repurchased $21 million principal amount of these secured second lien notes and in January 2017, Juneau sold the remaining $4 million to a third party. Our strategic priorities include the development of our pooled acreage in the East Eagle Ford, partnering with other proven operators in Juneau's other leaseholds outside of the East Eagle Ford and selectively selling assets.

At December 31, 2016 , we have made cumulative cash investments of $590.0 million in Vitesse and Juneau and the net book value of our oil and gas investments is $469.0 million. 


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Garcadia

Garcadia is a joint venture between us and Garff Enterprises, Inc. ("Garff"), which is owned by members of a family that has operated car dealerships for over 85 years. Garcadia owns and operates 28 domestic and foreign automobile dealerships in California, Iowa, Texas, and Michigan.  We and Garff have equal board representation and equal votes on all matters affecting Garcadia, and all cash flows from Garcadia are allocated 65% to us and 35% to Garff, with the exception of one dealership from which we receive 83% of all cash flows and four other dealerships from which we receive 71% of all cash flows.  Garcadia's strategy is to acquire automobile dealerships in primary or secondary market locations meeting its specified return criteria.  During 2016 we received cash distributions from Garcadia's dealerships of $52.6 million.

In addition, we own parcels of land that are leased to certain dealerships.  During 2016 we received rent payments related to these leases of $9.0 million.  At December 31, 2016 , the net book value of our investment in Garcadia was $185.8 million and our net investment in the parcels of land leased to the dealerships was $20.9 million, net of $55.7 million in mortgage debt.

Linkem

Linkem S.p.A. is a fixed wireless broadband service provider in Italy.  Unlike the U.S. and most of Western Europe, Italy does not have a national cable television system; as a result, Italy's broadband penetration rate is among the lowest in Europe. Linkem offers residential broadband services using LTE technologies deployed over the 3.5 GHz spectrum band. 

Our initial investment in Linkem was made in July 2011.  Since that time, we have funded most of Linkem's growth and become its largest shareholder.  As of December 31, 2016, we own about 42% of Linkem's common shares and 5% preferred stock convertible in 2020 (dividends can be paid in cash or in kind).  On an if-converted basis, we effectively owned 57% of the common shares of Linkem at December 31, 2016 .

Linkem owns or has exclusive rights to spectrum holdings of 84MHz covering over 80% of the population of Italy and at least 42MHz covering all of Italy. At December 31, 2016 , Linkem's network includes base stations deployed on over 2,000 wireless towers that can reach 60% of Italian households.  Linkem has over 403,000 subscribers for its services.  Linkem has been aggressively deploying LTE since the fourth quarter of 2014 with 96% of its base stations now LTE-enabled. LTE, provides subscribers with faster download speeds and improved service compared to DSL, the most popular broadband alternative. Linkem plans to increase its network coverage across Italy over the coming years as it adds subscribers; expansion and customer acquisition costs are expected to result in operating losses over the next couple of years. 

Through December 31, 2016 , we had invested $292.5 million in Linkem and the net book value of our investment was $154.0 million at December 31, 2016 . In January 2017, we participated in a preferred equity financing for Linkem. Existing shareholders, along with funds managed by BlackRock, invested €100 million in cash in exchange for shares of Linkem to fund future expansion plans, of which Leucadia's share was €30 million. The financing was based on a pre-money valuation of €700 million (post-money valuation of €800 million) and our fully-diluted ownership post-transaction is 53%.

Golden Queen Mining Company

Golden Queen is a joint venture between Golden Queen Mining Co., Ltd. ("GQM") and Gauss LLC.  We own 70% of Gauss, which in turn owns 50% of the joint venture, giving us an effective 35% interest in Golden Queen. Golden Queen developed and operates the Soledad Mountain Project, an open pit, heap leach gold and silver mining project located in Kern County, California.  The project uses conventional open pit mining methods, cyanide heap leach and Merrill-Crowe processes to recover gold and silver from crushed, agglomerated ore.  Gold and silver mining activities commenced in March 2016. GQM is a Canadian company that has been developing and exploring its mineral properties at Soledad Mountain since 1985.  GQM is publicly traded on both the Toronto Stock Exchange ("GQM") and on the OTCQX International ("GQMNF") markets.

We have invested $83.0 million in Golden Queen.  The net book value of our investment was $78.5 million at December 31, 2016 .

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 was $76.6 million at December 31, 2016 .


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Financial Information about Segments

Our operating segments consist of the consolidated businesses discussed above, which offer different products and services and are managed separately.  Our three reportable segments, based on both qualitative and quantitative requirements, are Jefferies, National Beef, and Corporate and other.  All other businesses and investments consist of our other financial services businesses and investments and our other merchant banking businesses and investments.  Our other financial services businesses and investments include the Leucadia Asset Management platform, Foursight Capital, and our investments in Berkadia, HomeFed and FXCM. Our other merchant banking businesses and investments primarily include Idaho Timber, Conwed, Vitesse, Juneau, real estate, and our investments in HRG, Linkem, Garcadia, and Golden Queen. Our financial information regarding our reportable segments is contained in Note 30, in our consolidated financial statements.

Information about Leucadia on the Internet

The following documents and reports are available on or through our website (www.leucadia.com) as soon as reasonably practicable after we electronically file such materials with, or furnish to, the SEC:

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 Leucadia National Corporation, 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 common shares.  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 common shares could decline, and you may lose all or part of your investment.

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 common shares.   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 common shares 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


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new markets.  These business activities expose us to new and enhanced risks, greater regulatory scrutiny of these activities, increased 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 investment in particular industries. We are a holding company with investments in businesses and assets in a number of industries.  Jefferies 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.

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.


The U.K. 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. Such an exit from the European Union is unprecedented and it is unclear how the U.K.'s access to the EU Single Market, and the wider trading, legal and regulatory environment in which our businesses and investments, their customers and their counterparties operate, will be impacted and how this will affect us and the global macroeconomic environment. The uncertainty surrounding the terms of the U.K.'s exit and its consequences could adversely impact customer and investor confidence, result in additional market volatility, and adversely affect Jefferies, FXCM, Linkem, as well as certain of HRG's subsidiaries, particularly those with operations or customers in Europe.

Unfounded allegations could result in share price volatility and price declines in debt securities and loss of revenue, clients, and employees.  Our reputation and business activity, and that of our businesses and investments, can be affected by statements and actions of third parties, even false or misleading statements by them.  While Jefferies has been subjected to such unfounded allegations in the past, and was able to dispel such rumors, its debt-securities prices suffered extreme volatility.  In addition, Jefferies operations in the past have been impacted as some clients either ceased doing business or temporarily reduced the level of business they do, thereby decreasing Jefferies revenue stream.  Although Jefferies was able to reverse the negative impact of past unfounded allegations and false rumors, there is no assurance that we, Jefferies, or any of our other businesses or investments, would be able to do so successfully in the future and the potential failure to do so could have a material adverse effect on our business, financial condition and liquidity.


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Jefferies and Leucadia Asset Management may incur losses if their risk management is not effective. Jefferies and Leucadia Asset Management seek to monitor and control their risk exposure. Their risk management processes and procedures are designed to limit their exposure to acceptable levels as they conducts their businesses. Jefferies applies a comprehensive framework of limits on a variety of key metrics to constrain the risk profile of its business activities. The size of the limit reflects Jefferies' risk tolerance for a certain activity. The framework includes 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 Jefferies and Leucadia Asset Management 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, Jefferies and Leucadia Asset Management may incur losses notwithstanding their risk management processes and procedures.

Recent legislation and new and pending regulation may significantly affect Jefferies 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 Jefferies, Leucadia Asset Management, FXCM, and Berkadia, but also their competitors and certain of their 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.

Extensive international regulation of Jefferies business limits its activities, and, if Jefferies violates these regulations, it may be subject to significant penalties.  The financial services industry is subject to extensive laws, rules and regulations in every country in which Jefferies operates.  Firms that engage in securities and derivatives 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.

Each of Jefferies regulators supervises its business activities to monitor compliance with such laws, rules and regulations in the relevant jurisdiction.  In addition, if there are instances in which Jefferies regulators question its compliance with laws, rules, and regulations, they may investigate the facts and circumstances to determine whether Jefferies has complied.  At any moment in time, Jefferies may be subject to one or more such investigation or similar reviews.  At this time, all such investigations and similar reviews are insignificant in scope and immaterial to Jefferies.  However, there can be no assurance that, in the future, the operations of Jefferies businesses 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.

A credit rating agency downgrade could significantly impact our businesses.  We and Jefferies have credit ratings issued by various credit rating agencies.  Maintaining our credit ratings is important to our and Jefferies 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.  Our failure to meet these ratios and percentages may trigger a ratings downgrade.  We and Jefferies 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 access to other forms of credit may be limited and our respective borrowing costs may increase if our or Jefferies credit ratings are downgraded.  A downgrade could also negatively impact our and Jefferies 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 to provide additional collateral to counterparties, exchanges and clearing organizations which would negatively impact our and Jefferies liquidity and financial condition.  There can be no assurance that our or Jefferies 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.


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Jefferies principal trading and investments expose us to risk of loss.  A considerable portion of Jefferies revenues is derived from trading in which Jefferies acts as principal.  Jefferies may incur trading losses relating to the purchase, sale or short sale of fixed income, high yield, international, convertible, and equity securities and futures and commodities for its own account.  In any period, Jefferies may experience losses on its inventory positions as a result of price fluctuations, lack of trading volume, and illiquidity.  From time to time, Jefferies 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 Jefferies inventory is marked to market on a daily basis, any adverse price movement in these securities could result in a reduction of Jefferies revenues and profits.  In addition, Jefferies may engage in hedging transactions that if not successful, could result in losses.

Increased competition may adversely affect Jefferies revenues, profitability and staffing.  All aspects of Jefferies business are intensely competitive.  Jefferies competes directly with a number of bank holding companies and commercial banks, other brokers and 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.  Jefferies believes that the principal factors affecting competition involve market focus, reputation, the abilities of professional personnel, the ability to execute the transaction, relative price of the service and products being offered, bundling of products and services and the quality of service.  Increased competition or an adverse change in Jefferies competitive position could lead to a reduction of business and therefore a reduction of revenues and profits.

Competition also extends to the hiring and retention of highly skilled employees.  A competitor may be successful in hiring away employees, which may result in Jefferies losing business formerly serviced by such employees.  Competition can also raise Jefferies costs of hiring and retaining the employees Jefferies needs to effectively operate its business.

Operational risks may disrupt Jefferies business, result in regulatory action against Jefferies or limit Jefferies growth.  Jefferies businesses are highly dependent on its ability to process, on a daily basis, a large number of transactions across numerous and diverse markets in many currencies, and the transactions Jefferies processes have become increasingly complex.  If any of Jefferies financial, accounting or other data processing systems do not operate properly or are disabled or if there are other shortcomings or failures in Jefferies internal processes, people or systems, Jefferies 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 Jefferies control, including a disruption of electrical or communications services or Jefferies inability to occupy one or more of our buildings.  The inability of Jefferies systems to accommodate an increasing volume of transactions could also constrain its ability to expand its businesses.

Certain of Jefferies 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 Jefferies is dependent are unable to meet increasingly demanding standards for processing and security or, if they fail or have other significant shortcomings, Jefferies could be adversely affected. Such consequences may include Jefferies inability to effect transactions and manage Jefferies exposure to risk.

In addition, despite the contingency plans Jefferies has in place, Jefferies ability to conduct business may be adversely impacted by a disruption in the infrastructure that supports its businesses and the communities in which they are located.  This may include a disruption involving electrical, communications, transportation or other services used by Jefferies or third parties with which Jefferies conducts business.

Jefferies operations rely on the secure processing, storage and transmission of confidential and other information in Jefferies computer systems and networks. Although Jefferies takes protective measures and devotes significant resources to maintaining and upgrading its systems and networks with measures such as intrusion and detection prevention systems, monitoring firewall to safeguard critical business applications and supervising third party providers that have access to its systems, Jefferies 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, Jefferies 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 Jefferies or its 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 Jefferies, its clients', its counterparties' or third parties' operations, including the transmission and execution of unauthorized transactions. Jefferies may be required to expend significant additional resources to modify its protective measures or to investigate and remediate vulnerabilities or other exposures, and Jefferies may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by Jefferies. 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, Jefferies and its third party providers continue to be


16


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.

Jefferies is also subject to laws and regulations relating to the privacy of the information of its clients, employees or others, and any failure to comply with these regulations could expose Jefferies to liability and/or reputational damage. In addition, Jefferies' businesses are increasingly subject to laws and regulations relating to surveillance, encryption and data on-shoring in the jurisdictions in which it operates. Compliance with these laws and regulations may require Jefferies to change its policies, procedures and technology for information security, which could, among other things, make Jefferies more vulnerable to cyber attacks and misappropriation, corruption or loss of information or technology.

Jefferies business is subject to significant credit risk.  In the normal course of Jefferies businesses, Jefferies 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 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 may also incur credit risk in its derivative transactions to the extent such transactions result in uncollateralized credit exposure to counterparties.

Jefferies seeks to control the risk associated with these transactions by establishing and monitoring credit limits and by monitoring collateral and transaction levels daily.  Jefferies may require counterparties to deposit additional collateral or return collateral pledged.  In the case of aged securities failed to receive, Jefferies 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 risk controls will be successful.

The prices and availability of key raw materials affects the profitability of our beef processing and manufacturing operations.   The supply and market price of cattle purchased by National Beef are dependent upon a variety of factors over which National Beef has no control, including fluctuations in the size of herds maintained by producers, the relative cost of feed and energy, weather and livestock diseases.  A decline in the supply of fed cattle available for National Beef's Brawley facility was a key factor in the 2013 decision to close National Beef's Brawley plant.  The cost of raw materials used by our manufacturing businesses have fluctuated over time as a result of a variety of factors. Although our manufacturing businesses are not currently experiencing any shortage of raw materials, if such shortages occur, revenues and profitability could decline.

Outbreaks of disease affecting livestock can adversely affect the supply of cattle and the demand for National Beef's products.   National Beef is subject to risks relating to animal health and disease control.  An outbreak of disease affecting livestock (such as foot-and-mouth disease or bovine spongiform encephalopathy ("BSE"), commonly referred to as mad cow disease) could result in restrictions on sales of products, restrictions on purchases of livestock from suppliers or widespread destruction of cattle.  The discovery of BSE in the past caused certain countries to restrict or prohibit the importation of beef products.  Outbreaks of diseases, or the perception by the public that an outbreak has occurred, or other concerns regarding diseases, can lead to inadequate supply, cancellation of orders by customers and create adverse publicity, any of which can have a significant negative impact on consumer demand and, as a result, on our consolidated financial position, cash flows and results of operations.

If National Beef's products or products made by others using its products become contaminated or are alleged to be contaminated, National Beef may be subject to product liability claims that could adversely affect its business. National Beef may be subject to significant liability in excess of insurance policy limits if its products or products made by others using its products cause injury, illness or death.  In addition, National Beef could recall or be required to recall products that are, or are alleged to be, contaminated, spoiled or inappropriately labeled.  Organisms producing food borne illnesses (such as E. coli ) could be present in National Beef's products and result in illness or death if they are not eliminated through further processing or cooking.  Contamination of National Beef's or its competitors' products may create adverse publicity or cause consumers to lose confidence in the safety and quality of beef products.  Allegations of product contamination may also be harmful even if they are untrue or result from third-party tampering.  Any of these events may increase costs or decrease demand for beef products, any of which could have a significant adverse effect on our consolidated financial condition, cash flows and results of operations.


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National Beef generally does not enter into long-term contracts with customers; as a result the volumes and prices at which beef products are sold are subject to market forces.   National Beef's customers generally place orders for products on an as-needed basis and, as a result, their order levels have varied from period to period in the past and may vary significantly in the future.  The loss of one or more significant customers, a significant decline in the volume of orders from customers or a significant decrease in beef product prices for a sustained period of time could negatively impact cash flows and results of operations.

National Beef's exports expose it to political and economic risks in the U.S. and foreign countries, as well as to risks related to currency fluctuations.   Approximately 10.8% of National Beef's annual sales are export sales, primarily to Japan, Mexico, South Korea, Hong Kong, China (for hides), Taiwan, Italy and Egypt, and on average these sales have a higher margin than domestic sales of similar products.  A reduction in international sales could adversely affect revenues and margins.  Risks associated with international activities include inflation or deflation and changes in foreign currency exchange rates, including changes in currency exchange rates of other countries that may export beef products in competition with National Beef; the closing of borders by foreign countries to product imports due to disease or other perceived health or food safety issues; exchange controls; changes in tariffs; changes in political or economic conditions; trade restrictions and changes in regulatory requirements.  The occurrence of any of these events could increase costs, lower demand for products or limit operations, which could have a significant adverse effect on cash flows, results of operations and future prospects. 

National Beef incurs substantial costs to comply with environmental regulations and could incur additional costs as a result of new regulations or compliance failures that result in civil or criminal penalties, liability for damages and negative publicity.   National Beef's operations are subject to extensive and stringent environmental regulations administered by the EPA and state, local and other authorities with regards to water usage, wastewater and storm water discharge, air emissions and odor, and waste management and disposal.  Failure to comply with these laws and regulations could have serious consequences, including criminal, civil and administrative penalties and negative publicity.  In addition, National Beef incurs and will continue to incur significant capital and operating expenditures to comply with existing and new or more stringent regulations and requirements.  All of National Beef's processing facilities procure wastewater treatment services from municipal or other regional governmental agencies that are in turn subject to environmental laws and permit limits regarding their water discharges.  As permit limits are becoming more stringent, upgrades and capital improvements to these municipal treatment facilities are likely.  In locations where National Beef is a significant volume discharger, it could be asked to contribute toward the costs of such upgrades or to pay significantly increased water or sewer charges to recoup such upgrade costs.  National Beef may also be required to undertake upgrades and make capital improvements to its own wastewater pretreatment facilities, the cost of which could be significant.  Compliance with environmental regulations has had and will continue to have a significant impact on National Beef's cash flows and profitability.  In addition, under most environmental laws, most notably the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and analogous state laws, National Beef could be held liable for the cost to investigate or remediate any contamination at properties it owns or operates, or as to which it arranges for the disposal or treatment of hazardous substances, as such liability is imposed without regard to fault.

National Beef is subject to extensive governmental regulation and noncompliance with or changes in applicable requirements could adversely affect its business, financial condition, cash flows and results of operations.   National Beef's operations are subject to extensive regulation and oversight by the USDA, including its FSIS and GIPSA agencies, the FDA, and other federal, state, local and foreign authorities regarding the procurement of cattle and the processing, packaging, storage, safety, distribution, advertising and labeling of its products.  Recently, food safety practices and procedures in the meat processing industry have been subject to more intense scrutiny and oversight by the USDA.  National Beef is also subject to a variety of immigration, labor and worker safety laws and regulations, including those relating to the hiring and retention of employees.  Failure to comply with existing or new laws and regulations could result in administrative penalties and injunctive relief, civil remedies, fines, interruption of operations, recalls of products or seizures of properties, potential criminal sanctions and personal injury or other damage claims.  These remedies, changes in the applicable laws and regulations or discovery of currently unknown conditions could increase costs, limit business operations and reduce profitability.

National Beef's performance depends on favorable labor relations with its employees, in particular employees represented by collective bargaining agreements.  A substantial number of National Beef's employees are covered by collective bargaining agreements. A labor-related work stoppage by unionized employees, or employees who become unionized in the future, could limit National Beef's ability to process and ship products or could increase costs.  Any significant increase in labor costs, deterioration of employee relations, slowdowns or work stoppages at any of National Beef's locations, whether due to union activities, employee turnover or otherwise, could have a material adverse effect on our financial condition, cash flows and results of operations. 


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Uncertainties inherent in HRG's business and operations could impact the realizability of the full value of our investment.  As a holding company, HRG is subject to risks and uncertainties across the industries in which it invests.  It is also subject to risks associated with its holding company structure, which include potential difficulties or limitations in receiving distributions from its subsidiaries, and the risk that acquisitions, dispositions or integrations of subsidiaries may not be successful.  The overall profitability of HRG is directly contingent on the profitability of its subsidiaries, which are subject to a number of specific risks, not limited to: substantial indebtedness and restrictive covenants within Spectrum Brands; operation of FGL in a highly regulated industry subject to numerous restrictions and regulations, including the recent "fiduciary" rule released by the Department of Labor in April 2016, which could have a material impact on its business model; the potential that HRG's agreed upon sale of FGL to Anbang may not close; and the reliance by Salus Capital on limited resources during its wind-down. We hold about 23% of the common shares of HRG and we record our investment at fair value.  As we do not control HRG, its management may make decisions that are not in our best interest.  HRG could decide to issue additional common shares, which would dilute our current ownership.  Additionally, changes in the market price of HRG shares may lead to volatility in our results of operations.  For additional risk factors concerning HRG, see its SEC filings.

Uncertainties relating to the results of FXCM could impact the value of our investment in FXCM. FXCM's revenue and operating results may vary significantly from period to period due to movements and trends in the world's currency markets and to fluctuations in trading levels. In addition, attrition of customer accounts, which are primarily comprised of individual retail customers, and failure to attract new accounts could impact revenue and profitability. FXCM is also subject to regulatory risks, as well as risks such as those relating to government actions like the unexpected actions of the Swiss National Bank on January 15, 2015, which resulted in the historic movement in the Swiss Franc.


We do not have the power to direct the activities that most significantly impact FXCM's performance therefore its management may make decisions that are not in our best interest. It is difficult to anticipate all of the ramifications of the recent regulatory settlement between the NFA, the CFTC, FXCM Holdings, FXCM U.S., and certain of its principals, including the impact to its relationships with customers, regulators outside of the U.S., and other entities with which the subsidiaries of FXCM transact, any of which could materially impact the value of our investment in FXCM. For additional risk factors concerning FXCM, see FXCM Inc.'s SEC filings.

The performance of our oil and gas exploration and development investments, Juneau and Vitesse, is impacted by uncertainties specific to the oil and gas industry which we cannot control.   This 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 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.

Declines in the U.S. housing market may reduce revenues of our manufacturing businesses.   Our manufacturing operations, particularly Idaho Timber, generate significant revenues when the U.S. housing market is strong.  If the U.S. housing market were to decline, Idaho Timber's revenues and profitability would be adversely impacted.

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 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.  Damages from storms could result in the closing of our facilities to make repairs, resulting in lost business and adversely affecting results of operations.

When Berkadia originates loans for Fannie Mae, it is often required to share in the losses on such loans, which could be in excess of reserved amounts.  Berkadia carries a reserve on its balance sheet for contingent losses on loans originated for Fannie Mae that have loss sharing requirements.  If actual losses exceed amounts reserved, Berkadia's profitability and cash flows will be reduced.

The loss of or changes in Berkadia's relationships with U.S. Government-Sponsored Enterprises and federal agencies would have an adverse effect on Berkadia's business.  Berkadia's failure to comply with U.S. Government-Sponsored Enterprise or agency requirements may result in its termination as an approved seller/servicer, mortgagee or issuer.  The loss of any such status could have a significant adverse impact on Berkadia's results of operations, could result in a loss of similar approvals from other U.S. Government-Sponsored Enterprises or federal agencies and could have other adverse consequences to the business.  Fannie Mae and Freddie Mac retain broad discretion to terminate Berkadia as a seller/servicer without cause upon notice.


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Changes in existing government-sponsored and federal mortgage programs could negatively affect Berkadia's business.   Berkadia's ability to generate income through mortgage sales to institutional investors depends in part on programs sponsored by Fannie Mae, Freddie Mac and the FHA, which purchase such loans from Berkadia and/or facilitate the issuance of mortgage-backed securities in the secondary market.  Any discontinuation of, or significant reduction or change in, the operation of those programs would have an adverse effect on Berkadia's loan origination and servicing business and results of operations.

Berkadia's fee-for-service businesses may be terminated on short notice.   Some of Berkadia's fee-for-service customers are permitted to terminate Berkadia on short notice, usually 30 days.  If Berkadia loses fee-for-service customers, it would negatively impact Berkadia's results of operations and cash flows.

Certain loan programs expose Berkadia to credit and interest rate risk that it is not subject to with its government agency lending programs.   Unlike its government agency lending programs, Berkadia makes certain short term, floating rate bridge loans ("Bridge Loans") which are held on Berkadia's balance sheet and not intended for sale and may from time to time originate loans for sale into commercial mortgage-backed securitizations ("CMBS Loans"). Berkadia cannot be assured it will be able to sell CMBS Loans and Bridge Loans at par value to a third-party without any exposure to credit or interest rate risk.  If for any reason Berkadia is unable to sell a CMBS Loan into the securitization market or if a borrower is unable to refinance a Bridge Loan, Berkadia will retain all risks associated with such loan for as long as it owns the loan.  Berkadia may be forced to foreclose on defaulted loans and suffer a loss, or to sell loans to a third party at a discount, either of which would reduce Berkadia's profitability and cash flows. As of December 31, 2016, the aggregate amount of Bridge Loans on Berkadia's balance sheet was $452.0 million. Berkadia did not originate any CMBS Loans in 2016 and as of December 31, 2016 had no such loans held for sale.

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 $2.5 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 December 31, 2016 , the aggregate amount of commercial paper outstanding was $1.47 billion.

Garcadia's business is dependent, in part, upon revenue from new and used car sales at its dealerships, and declines in revenues due to industry or other factors could result in reduced profitability, reduced cash flows and/or impairment charges.   Garcadia has recorded impairment charges in the past, principally for goodwill and other intangible assets, and if the automobile industry experiences a downturn in the future, additional impairment charges are likely, reducing our profitability.

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.

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.

Extreme weather, loss of electrical power or other forces beyond our control could negatively impact our business.   Natural disasters, fire, terrorism, pandemic or extreme weather, including droughts, floods, excessive cold or heat, hurricanes or other storms, could interfere with our operating businesses due to power outages, fuel shortages, water shortages, damage to facilities or disruption of transportation channels, among other things.  Any of these factors, as well as disruptions to information systems, could have an adverse effect on financial results.

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 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,


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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.

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 be adversely affected by changes in U.S. and non-U.S. tax laws in the countries in which we operate. The U.S. Congress and the President of the U.S. have indicated a desire to reform the U.S. corporate income tax. As part of any tax reform, it is possible that the U.S. corporate income tax rate may be reduced. Additionally, there may be other potential changes including modifying the taxation of income earned outside the U.S., and/or limiting or eliminating various other deductions, credits or tax preferences. At this time, it is not possible to measure the potential impact on the value of our deferred tax assets (the value of which would be reduced approximately proportionately to any reduction in the U.S income tax rates), business, prospects or result of operations that might result upon enactment.

We may not be able to generate sufficient taxable income to fully realize our deferred tax asset, which would also have to be reduced if U.S. federal income tax rates are lowered.   At December 31, 2016 , we have recognized net deferred tax assets of $1.5 billion.  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"), 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 stockholders' equity.  In addition, if U.S. federal income tax rates are lowered, we would be required to reduce our net deferred tax asset with a corresponding non-cash reduction to earnings during the period.

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 Consolidated Statement of Financial Condition or results of operations.

We have indicated our intention to pay dividends at the annual rate of $0.25 per common share, on a quarterly basis.   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.

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 advisors and/or us to determine whether their ownership of our common shares approaches the proscribed level.


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Item 1B .

Unresolved Staff Comments .

Not applicable.


Item 2 .

Properties .

Our and Jefferies global executive offices and principal administrative offices are located at 520 Madison Avenue, New York, New York under an operating lease arrangement. 

Jefferies 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 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 leases all of its office space, or contract via service arrangement, which management believes is adequate for its business.

National Beef's processing facilities, which are the principal properties used in its business, are described in Item 1 of this report.  National Beef also leases corporate office space in Kansas City, Missouri for its headquarters facility.

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 25 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 25 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.


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PART II

Item 5 .

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities .

Our common shares are traded on the NYSE under the symbol LUK.  The following table sets forth, for the calendar periods indicated, the high and low sales price per common share on the consolidated transaction reporting system, as reported by the Bloomberg Professional Service provided by Bloomberg L.P.

Common Share

High

Low

2015

First Quarter

$

24.80


$

21.28


Second Quarter

25.09


22.22


Third Quarter

25.39


19.64


Fourth Quarter

21.29


15.93


2016



First Quarter

$

17.39


$

14.27


Second Quarter

18.22


15.32


Third Quarter

19.49


16.53


Fourth Quarter

24.17


17.87


2017



First Quarter (through February 16, 2017)

$

25.37


$

22.69


As of February 16, 2017 , there were approximately 1,674 record holders of the common shares.

We paid cash dividends of $.0625 per share each quarter during 2016, 2015 and 2014 .  We have indicated our intention to pay dividends currently at the annual rate of $0.25 per common share on a quarterly basis.  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 five percent or more of the common shares and the ability of persons or entities now owning five percent 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 November 2012, our Board of Directors authorized a share repurchase program pursuant to which we may, from time to time, purchase up to an aggregate of 25,000,000 of our common shares, inclusive of prior authorizations.  During 2016 , we repurchased a total of 3,838,412 shares in the open market pursuant to this program. Separately, during the twelve months ended December 31, 2016 , we repurchased an aggregate of 1,596,602 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.

There were no unregistered sales of equity securities during the period covered by this report.


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The following table presents information on our purchases of our common shares during the three months ended December 31, 2016 :

Total

Number of

Shares

Purchased

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 2016

315,644


$

18.78


-


16,833,607


November 2016

672,019


$

18.72


672,019


16,161,588


December 2016

147,147


$

23.04


-


16,161,588


Total

1,134,810



672,019



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, 2011 to December 31, 2016 .  Index data was furnished by Standard & Poor's Capital IQ.  The graph assumes that $100 was invested on December 31, 2011 in each of our common stock, the S&P 500 Index and the S&P 500 Financials Index and that all dividends were reinvested.


24


Item 6 .

Selected Financial Data .

The following selected financial data have been summarized from our consolidated financial statements and are qualified in their entirety by reference to, and should be read in conjunction with, such consolidated financial statements and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations of this report.

Year Ended December 31,

2016

2015

2014

2013

2012

(In thousands, except per share amounts)

SELECTED INCOME STATEMENT DATA: (a)

Net revenues (b)

$

10,062,617


$

10,886,458


$

11,486,485


$

10,425,746


$

9,404,584


Expenses

9,900,785


10,640,203


11,243,790


9,999,202


8,051,204


Income from continuing operations before income taxes

316,430


356,536


381,222


545,585


1,442,029


Income tax provision

122,109


109,947


165,971


136,481


539,464


Income from continuing operations

194,321


246,589


215,251


409,104


902,565


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

-


5,522


(16,226

)

(46,911

)

(37,924

)

Net income attributable to Leucadia National Corporation common shareholders

125,938


279,587


204,306


369,240


854,466


Per share:






Basic earnings (loss) per common share attributable to Leucadia National Corporation common shareholders:






Income from continuing operations

$

0.34


$

0.73


$

0.58


$

1.20


$

3.64


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

-


0.01


(0.04

)

(0.13

)

(0.15

)

Net income

$

0.34


$

0.74


$

0.54


$

1.07


$

3.49


Diluted earnings (loss) per common share attributable to Leucadia National Corporation common shareholders:






Income from continuing operations

$

0.34


$

0.73


$

0.58


$

1.20


$

3.59


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

-


0.01


(0.04

)

(0.14

)

(0.15

)

Net income

$

0.34


$

0.74


$

0.54


$

1.06


$

3.44


At December 31,

2016

2015

2014

2013

2012

(In thousands, except per share amounts)

SELECTED BALANCE SHEET DATA: (a)

Total assets

$

45,071,307


$

46,331,184


$

52,614,324


$

47,858,780


$

9,343,881


Long-term debt

7,380,443


7,400,582


8,519,584


8,172,864


1,353,458


Mezzanine equity

461,809


316,633


311,686


366,075


241,649


Shareholders' equity

10,128,100


10,401,211


10,302,158


10,102,462


6,767,268


Book value per common share

$

28.18


$

28.68


$

28.03


$

27.71


$

27.67


Cash dividends per common share

$

0.25


$

0.25


$

0.25


$

0.25


$

0.25


(a)

Subsidiaries are reflected above as consolidated entities from the date of acquisition.  Jefferies was acquired on March 1, 2013. 

(b)

Includes net realized securities gains of $29.5 million, $63.0 million, $30.4 million, $244.0 million and $590.6 million for the years ended December 31, 2016 , 2015 , 2014 , 2013 and 2012 , respectively.



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.


26


Results of Operations

We focus on long-term value creation and invest in a broad variety of businesses.  The mix of our business and investments change from time to time. Our 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.  Further, as our investments span a number of industries, each may be impacted by different factors.  For these reasons, our pre-tax income is not predictable or necessarily comparable from period to period.

A summary of results of continuing operations for the year ended December 31, 2016 is as follows (in thousands):

Jefferies

National Beef

Other Financial Services Businesses and Investments

Other Merchant Banking Businesses and Investments

Corporate and Other

Parent Company Interest

Total

Net revenues

$

2,421,055


$

7,027,243


$

(46,028

)

$

571,757


$

88,590


$

-


$

10,062,617


Expenses:



Cost of sales

-


6,513,768


-


337,039


-


-


6,850,807


Compensation and benefits

1,568,824


39,271


53,569


30,923


37,998


-


1,730,585


Floor brokerage and clearing fees

167,205


-


-


-


-


-


167,205


Interest

-


12,946


33,771


3,105


-


58,881


108,703


Depreciation and amortization

60,206


94,482


13,697


39,589


3,619


-


211,593


Selling, general and other expenses (including provision for doubtful accounts)

581,312


37,754


50,782


129,808


32,236


-


831,892


Total expenses

2,377,547


6,698,221


151,819


540,464


73,853


58,881


9,900,785


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

43,508


329,022


(197,847

)

31,293


14,737


(58,881

)

161,832


Income related to associated companies

-


-


124,508


26,441


3,649


-


154,598


Income (loss) from continuing operations before income taxes

$

43,508


$

329,022


$

(73,339

)

$

57,734


$

18,386


$

(58,881

)

$

316,430




27


A summary of results of continuing operations for the year ended December 31, 2015 is as follows (in thousands):

Jefferies

National Beef

Other Financial Services Businesses and Investments

Other Merchant Banking Businesses and Investments

Corporate and Other

Parent Company Interest

Inter-company Eliminations

Total

Net revenues

$

2,476,133


$

7,402,419


$

524,053


$

426,731


$

78,122


$

-


$

(21,000

)

$

10,886,458



Expenses:




Cost of sales

-


7,347,874


-


329,359


-


-


-


7,677,233


Compensation and benefits

1,467,752


34,781


35,054


24,657


103,221


-


-


1,665,465


Floor brokerage and clearing fees

199,780


-


-


-


-


-


-


199,780


Interest

-


16,633


9,404


2,586


-


87,181


-


115,804


Depreciation and amortization

92,165


89,317


8,176


30,731


3,744


-


-


224,133


Selling, general and other expenses (including provision for doubtful accounts)

597,271


37,729


48,279


79,421


16,088


-


(21,000

)

757,788


Total expenses

2,356,968



7,526,334



100,913



466,754



123,053



87,181


(21,000

)


10,640,203


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

119,165



(123,915

)


423,140



(40,023

)


(44,931

)


(87,181

)

-



246,255


Income related to associated companies

-


-


81,688


27,957


636


-


-


110,281


Income (loss) from continuing operations before income taxes

$

119,165



$

(123,915

)


$

504,828



$

(12,066

)


$

(44,295

)


$

(87,181

)

$

-



$

356,536



28


A summary of results of continuing operations for the year ended December 31, 2014 is as follows (in thousands):

Jefferies

National Beef

Other Financial Services Businesses and Investments

Other Merchant Banking Businesses and Investments

Corporate and Other

Parent Company Interest

Total

Net revenues

$

2,986,325


$

7,832,424


$

68,241


$

538,775


$

60,720


$

-


$

11,486,485


Expenses:


Cost of sales

-


7,708,007


-


316,279


-


-


8,024,286


Compensation and benefits

1,697,533


38,660


12,530


21,917


71,034


-


1,841,674


Floor brokerage and clearing fees

215,329


-


-


-


-


-


215,329


Interest

-


15,136


4,350


1,554


-


99,895


120,935


Depreciation and amortization

78,566


85,305


4,266


12,229


5,627


-


185,993


Selling, general and other expenses (including provision for doubtful accounts)

636,501


25,619


12,377


53,460


127,616


-


855,573


Total expenses

2,627,929


7,872,727


33,523


405,439


204,277


99,895


11,243,790


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

358,396


(40,303

)

34,718


133,336


(143,557

)

(99,895

)

242,695


Income related to associated companies

-


-


104,337


33,361


829


-


138,527


Income (loss) from continuing operations before income taxes

$

358,396


$

(40,303

)

$

139,055


$

166,697


$

(142,728

)

$

(99,895

)

$

381,222





29


Jefferies

Jefferies was acquired on March 1, 2013 and is reflected in our consolidated financial statements utilizing a one month lag; Jefferies fiscal year ends on November 30 th and its fiscal quarters end one month prior to our reporting periods.  A summary of results of operations for Jefferies included in the years ended December 31, 2016, 2015 and 2014 is as follows (in thousands):

2016

2015

2014

Net revenues

$

2,421,055


$

2,476,133


$

2,986,325


Expenses:




Compensation and benefits

1,568,824


1,467,752


1,697,533


Floor brokerage and clearing fees

167,205


199,780


215,329


Depreciation and amortization

60,206


92,165


78,566


Provision for doubtful accounts

7,365


(396

)

55,355


Selling, general and other expenses

573,947


597,667


581,146


Total expenses

2,377,547


2,356,968


2,627,929


Income before income taxes

$

43,508


$

119,165


$

358,396


Jefferies 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 business, by its nature, does not produce predictable or necessarily recurring revenues or earnings.  Jefferies results in any given period can be materially affected by conditions in global financial markets, economic conditions generally, and its own activities and positions.

On April 9, 2015, Jefferies entered into an agreement to transfer certain of the client activities of its Jefferies Bache business to Société Générale S.A. During the second quarter of 2016, Jefferies completed the exit of the Futures business. Net revenues globally from this business activity, which are included within Jefferies fixed income results, and expenses directly related to the Bache business, which are included within non-interest expenses, were $80.2 million and $214.8 million, respectively, in 2015 and $202.8 million and $296.3 million, respectively, in 2014. There were no meaningful revenues or expenses from the Bache business for 2016. Total expenses for 2015 include costs of $73.1 million, on a pre-tax basis, related to the exit of the Bache business. These costs consist primarily of severance, retention and benefit payments for employees, incremental amortization of outstanding restricted stock and cash awards, contract termination costs and incremental amortization expense of capitalized software expected to no longer be used subsequent to the wind-down of the business. For further information, refer to Note 31 in our consolidated financial statements.

As more fully described in our discussion of Critical Accounting Estimates, Goodwill, Jefferies recognized goodwill impairment losses of $54.0 million in its stand-alone financial statements for 2014 based on an evaluation performed on the basis of its reporting units.  In accordance with U.S. GAAP, we have not recognized these losses on a consolidated basis.

The discussion below is presented on a detailed product and expense basis.  Net revenues presented for equity and fixed income businesses include allocations of interest income and interest expense as Jefferies assesses the profitability of these businesses inclusive of the net interest revenue or expense associated with the respective sales and trading activities, which is a function of the mix of each business's associated assets and liabilities and the related funding costs.


30


The following provides a summary of net revenues by source included in the years ended December 31, 2016, 2015 and 2014 (in thousands):

2016

2015

2014

Equities

$

553,169


$

757,764


$

690,793


Fixed income

642,982


271,947


751,848


Total sales and trading

1,196,151


1,029,711


1,442,641


Investment banking:




Capital markets:




Equities

235,207


408,474


339,683


Debt

304,576


397,979


627,536


Advisory

654,190


632,354


559,418


Total investment banking

1,193,973


1,438,807


1,526,637


Other

30,931


7,615


17,047


Total net revenues

$

2,421,055


$

2,476,133


$

2,986,325


Net Revenues

Net revenues for 2016 were impacted by an extremely volatile bear market environment during the first three months of the year, with meaningful improvement over the rest of the year. Net revenues for the first quarter of 2016 declined $292.7 million or 49.5% in comparison to the first quarter of 2015. The decrease in total net revenues for 2016 primarily reflects lower net revenues in investment banking and equities, partially offset by increased revenues in fixed income. Net revenues for 2016 included investment income from managed funds of $4.7 million, compared with investment losses from managed funds of $23.8 million in 2015, primarily due to lower valuations in the energy and shipping sectors in 2015.

Net revenues for 2015 reflect the impact of challenging market conditions throughout the year on Jefferies fixed income business, partially offset by increased revenues in Jefferies equities business. Almost all of Jefferies fixed income credit businesses were impacted by lower levels of liquidity due to the expectations of interest rate increases by the Federal Reserve and deterioration in the global energy and distressed markets.

Net revenues for 2014 reflect record investment banking revenues, partially offset by lower revenue due to challenging trading environments in Jefferies fixed income business, particularly in the fourth quarter of 2014.  Jefferies core equities business performed relatively well during 2014. 

Equities Net Revenues

Equities net revenues include equity commissions, equity security principal trading and investments (including Jefferies investments in KCG Holdings, Inc. ("KCG") and other equity securities) and net interest revenue generated by its equities sales and trading, prime services and wealth management business relating to cash equities, electronic trading, equity derivatives, convertible securities, prime brokerage, securities finance and alternative investment strategies.  Equities net revenues include Jefferies share of the net earnings of its joint venture investments in Jefferies Finance, LLC and Jefferies LoanCore, LLC, which are accounted for under the equity method. Equities net revenues also include Jefferies investment in HRG, prior to its sale to Leucadia in March 2014, at fair market value.

Total equities net revenues were $553.2 million for 2016 compared with $757.8 million in 2015. Results for 2016 includes a net loss of $17.9 million from Jefferies investment in two equity positions, including KCG, as compared to gains of $49.2 million in 2015 from these two equity positions. In addition, equities net revenues for 2015 included significant gains on additional securities positions, which were not repeated during 2016. Equities commission revenues gained slightly with improved market share across various product and client segments. Commissions in Jefferies cash equities and equity derivatives businesses held firm, while global electronic trading commissions gained from increased volumes and client market share. In Jefferies global electronic trading business, Jefferies has market leading customized algorithms in over 40 countries. European equities commissions increased due to improved market share, while commissions in Jefferies Asia Pacific cash equities business declined because of a challenging


31


market environment. Jefferies global cash businesses were among the highest market share gainers compared with Jefferies peers and, in the U.S. and U.K., Jefferies platform remains in the top 10.

Equities trading revenues were solid across most of Jefferies equities sales and trading businesses in 2016. Trading revenues from client market making improved in Jefferies U.S. and European cash equities businesses. Equity derivatives trading revenues declined due to a difficult volatility trading climate and convertibles trading revenues declined driven by weakness in the energy sector during 2016. In addition, certain strategic investments gained from exposures to energy, volatility, financial and currency markets.

Equities net revenues during 2016 included a net loss of $9.3 million from Jefferies share of Jefferies Finance, primarily due to the mark down of certain loans held for sale during the first part of 2016, compared with net revenues of $41.4 million in 2015. Net revenues from Jefferies share of Jefferies LoanCore also decreased during 2016 as compared to 2015 due to a decrease in loan closings and syndications.

Total equities net revenues were $757.8 million for 2015, compared with $690.8 million in 2014. Results in 2015 include a net gain of $49.1 million from Jefferies investment in KCG compared with a loss of $14.7 million from Jefferies investment in KCG and a gain of $19.9 million from Jefferies investment in HRG in 2014.

Strong revenues in 2015, as a result of increased trading volumes, from Jefferies electronic trading platform contributed to higher commissions revenues. Total equities net revenues also include higher revenues from the Asia Pacific cash equities business and net mark-to-market gains from equity investments, as well as growth from Jefferies wealth management platform. This was partially offset by lower revenues from equity block trading results from Jefferies cash equities business and lower commissions in Jefferies European cash equities business.

Equities net revenues from the Jefferies LoanCore joint venture during 2015 include higher revenues from an increase in loan closings and securitizations by the joint venture over 2014. Equities net revenues from the Jefferies Finance joint venture during 2015 include lower revenues as a result of syndicate costs associated with the sell down of commitments, as well as reserves taken on certain loans held for investment as compared with 2014.

Fixed Income Net Revenues

Fixed income net revenues include commissions, principal transactions and net interest revenue generated by Jefferies fixed income sales and trading businesses from investment grade corporate bonds, mortgage- and asset-backed securities, government and agency securities, interest rate derivatives, municipal bonds, emerging markets debt, high yield and distressed securities, bank loans, foreign exchange and commodities trading activities.

Jefferies recorded higher revenues in 2016 as compared to 2015 due to improved trading conditions across most core businesses, partially offset by lower revenues in its international rates business due to lower trading volumes. 2015 included $80.2 million of net revenues globally from the Bache business activity. There were no meaningful revenues from the Bache business during 2016, as Jefferies completed the exit of the Bache business during the second quarter of 2016. Excluding revenues from the Bache business activity, revenues increased $451.2 million.


Revenues in Jefferies leveraged credit business were strong on increased trading volumes within high yield and distressed, as a result of an improved credit environment, as well as strategic growth in the business, compared with mark-to-market write-downs in 2015. Results in Jefferies emerging markets business throughout 2016 were higher as compared to 2015 due to an upgraded sales and trading team and increased levels of volatility and improved market conditions. Revenues in 2016 from Jefferies corporates businesses increased as compared to 2015 due to increased client activity and higher demand for new issuances and higher yielding investments. Jefferies mortgages businesses were positively impacted by increased demand for spread products compared with the negative impact of market volatility as credit spreads tightened for these asset classes and expectations of future rate increases in 2015. The municipal securities business performed well during 2016 as improved trading activity was driven by market technicals compared with net outflows in 2015. Volatility during 2016 due to fluctuating expectations as to future Federal Reserve interest rate increases contributed to increased revenues in Jefferies U.S. rates business as compared to the prior year.


Jefferies recorded lower revenues during the 2015 period as compared to 2014, primarily due to tighter trading conditions across most core businesses and losses in Jefferies high yield distressed sales and trading business and international mortgages business, partially offset by higher revenues in its U.S. and International rates businesses, as well as its U.S. investment grade corporate credit business. 2015 included $80.2 million of net revenues globally from the Bache business activity compared with $202.8 million in 2014. Excluding revenues from the Bache business activity, revenues decreased $357.3 million.



32


The higher revenues in Jefferies U.S. and International rates businesses, as well as its U.S. investment grade corporate credit business, resulted from higher transaction volumes in 2015 as compared to 2014, as volatility caused attractive yields and interest in new issuances. However, that same volatility negatively impacted the municipal securities business as prices declined and the sector experienced overall net cash outflows. Most of Jefferies credit fixed income businesses were negatively impacted during 2015 by periods of extreme volatility and market conditions, as investors focused on liquidity, resulting in periods of low trading volume during the year. In addition, results in Jefferies distressed trading businesses in 2015 were negatively impacted by its position in the energy sector and led to mark-to-market write-downs in its inventory and results in its emerging markets business were lower due to slower growth in the emerging markets during 2015 as compared to 2014. Jefferies mortgages business was also negatively impacted in 2015 by market volatility as credit spreads tightened for these asset classes and expectations of future rate increases resulted in lower trading volumes and revenues.

Investment Banking Revenues

Jefferies provides a full range of capital markets and financial advisory services to its clients across most industry sectors in the Americas, Europe and Asia.  Capital markets revenues include underwriting and placement revenues related to corporate debt, municipal bonds, mortgage- and asset-backed securities and equity and equity-linked securities.  Advisory revenues consist primarily of advisory and transaction fees generated in connection with merger, acquisition and restructuring transactions.

Total investment banking revenues were $1,194.0 million for 2016, 17.0% lower than 2015. Lower investment banking results were attributable to lower new issue equity and leveraged finance capital markets revenues. This was primarily as a result of the capital markets slowdown, which began in the second half of 2015 and continued for much of 2016. From equity and debt capital raising activities, Jefferies generated $235.2 million and $304.6 million in revenues, respectively, for 2016, a decrease of 42.4% and 23.5%, respectively, from 2015.


Jefferies reduced capital markets activity for 2016 was partially offset by record advisory revenues. Specifically, Jefferies advisory revenues for 2016 increased 3.5% compared to 2015, primarily through an increase in the number of merger, acquisition and restructuring transactions, including closing a record number of merger and acquisition transactions in excess of $1 billion.


Jefferies investment banking results benefited both from a record fourth quarter of advisory fees in 2016, with Jefferies merger, acquisition and restructuring and recapitalization businesses showing continued momentum, and from improvement in capital markets activity, which began in the late summer of 2016, leading to an increase in new issue transaction volume.

During 2015, Jefferies generated $1,438.8 million in investment banking revenues, $87.8 million lower than 2014, reflecting lower debt capital market revenues, partially offset by record equities capital markets and advisory revenues. Overall, capital markets revenues for 2015 decreased 16.6% from 2014, primarily due to significantly lower transaction volume in the leveraged finance market. From equity and debt capital raising activities, Jefferies generated $408.5 million and $398.0 million in revenues, respectively, in 2015, an increase of 20.3% and a decrease of 36.6%, respectively, from 2014. Record advisory revenues of $632.4 million for 2015, an increase of 12.5%, were primarily due to higher transaction volume.

Compensation and Benefits

Compensation and benefits expense consists of salaries, benefits, cash bonuses, commissions, annual cash compensation awards, and the amortization of certain non-annual 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 within Compensation and benefits expense are share-based amortization expense for senior executive awards granted in September 2012 and February 2016, non-annual share-based and cash-based awards to other employees and certain year end awards that contain future service requirements for vesting.  Such senior executive awards contain market and performance conditions and are being amortized over their respective future service periods. Compensation expense related to the amortization of share-based and cash-based awards amounted to $287.3 million, $307.7 million and $283.3 million for 2016, 2015 and 2014 , respectively. Compensation and benefits as a percentage of Net revenues was 64.8%, 59.3% and 56.8% for 2016, 2015 and 2014 , respectively.

Compensation and benefits expense directly related to Jefferies Bache business was $87.7 million and $98.6 million for 2015 and 2014, respectively, and was not meaningful for 2016. Included within Compensation and benefits expense for the Bache business


33


for 2015 are severance, retention and related benefits costs of $38.2 million, incurred as part of decisions surrounding the exit of this business.

Non-Compensation Expenses

Non-compensation expenses include floor brokerage and clearing fees, 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, bad debt provision and depreciation and amortization expense, are included within Selling, general and other expenses in the Consolidated Statements of Operations.

In 2016, non-compensation expenses decreased 9.1% compared to 2015. The decrease in 2016 was due to the exiting of the Bache business, which in 2015 generated $127.2 million of non-compensation expenses, including accelerated amortization expense of $19.7 million related to capitalized software, $11.2 million in contract termination costs and professional services costs of approximately $2.5 million in connection with Jefferies actions in exiting the Bache business. There were no meaningful non-compensation expenses related to the Bache business in 2016. This reduction in 2016 was partially offset by higher technology and communications expenses, excluding the Bache business, and higher professional services expenses, excluding the Bache business. Technology and communications expenses, excluding the Bache business, increased due to higher costs associated with the development of the various trading systems and projects associated with corporate support infrastructure. In both years, Jefferies continued to incur legal and consulting fees as part of implementing various regulatory requirements. During 2015, Jefferies also released $4.4 million in reserves related to the resolution of bankruptcy claims against Lehman Brothers Holdings, Inc.


In 2015, non-compensation expenses were 4.4% lower compared to 2014. The decline is primarily related to bad debt expenses recognized in 2014 and lower Bache expenses. During the fourth quarter of 2014, Jefferies recognized a bad debt provision, which primarily related to a receivable of $52.3 million from a client to which Jefferies provided futures clearing and execution services, which declared bankruptcy. Non-compensation expenses for 2014 also includes approximately $7.6 million in impairment losses related to customer relationship intangible assets within the Bache business and Jefferies International Asset Management business. Non-compensation expenses associated directly with the activities of the Bache business were $127.2 million and $197.7 million for 2015 and 2014, respectively.

National Beef

A summary of results of operations for National Beef for the three years in the period ended December 31, 2016 is as follows (in thousands):

2016

2015

2014

Net revenues

$

7,027,243


$

7,402,419


$

7,832,424


Expenses:



Cost of sales

6,513,768


7,347,874


7,708,007


Compensation and benefits

39,271


34,781


38,660


Interest

12,946


16,633


15,136


Depreciation and amortization

94,482


89,317


85,305


Selling, general and other expenses

37,754


37,729


25,619


Total expenses

6,698,221


7,526,334


7,872,727


Income (loss) before income taxes

$

329,022


$

(123,915

)

$

(40,303

)

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.


34


Revenues in 2016 decreased about 5% in comparison to 2015, due to lower average selling prices for beef and beef by-products, partially offset by an increase in the number of cattle processed. Revenues in 2015 decreased about 5% in comparison to 2014, due to lower sales volume, as fewer cattle were processed, and lower average selling prices for beef and beef by-products. Additionally, during 2015, decreases to revenues of $52.9 million were recorded as a result of National Beef's use of derivatives in its hedging activity. For 2016, cost of sales declined 11% as compared to 2015, due to a decrease in the price of fed cattle, partially offset by an increase in volume. For 2015, cost of sales declined 5% as compared to 2014, due to fewer cattle processed, and a decrease in the price of cattle. 

For 2016, the combined effects of increased margin per head and an increase in volume led to record high profitability. For 2015, the combined effects of both lower volumes and tighter margins due to the relative price of cattle compared to the selling price of beef and beef by-products impacted margins leading to reduced profitability compared to 2014. Selling, general and other expenses in 2015 included a $4.7 million impairment charge in connection with National Beef's decision to close its Brawley, California beef processing plant. Also in connection with closing the Brawley facility, National Beef recognized $6.9 million of costs including employee separation and retention, systems decommissioning and various other expenses in 2014.  Of these amounts, $4.6 million related to employee separation, which is included in Compensation and benefits, and the various other costs are included in Selling, general and other expenses. 

Corporate and Other Results

A summary of results of operations for corporate and other for the three years in the period ended December 31, 2016 is as follows (in thousands):

2016

2015

2014

Net revenues

$

88,590


$

78,122


$

60,720


Expenses:



Corporate compensation and benefits

35,009


52,385


61,736


WilTel pension

2,989


50,836


9,298


Depreciation and amortization

3,619


3,744


5,627


Selling, general and other expenses

32,236


16,088


127,616


Total expenses

73,853


123,053


204,277


Income (loss) before income taxes and income related to associated companies

14,737


(44,931

)

(143,557

)

Income related to associated companies

3,649


636


829


Pre-tax income (loss) from continuing operations

$

18,386


$

(44,295

)

$

(142,728

)

Net revenues of corporate and other primarily include realized and unrealized securities gains and interest income for investments which are held at the holding company. Revenues for 2016 include a $65.6 million increase in a trading asset which is held at fair value. Revenues for 2015 include a net realized securities gain related to a recovery of $35.0 million of an investment in a non-public security that was sold and had been written off in prior years. Revenues for 2014 consist primarily of interest income and a number of smaller securities gains.

For the years ended December 31, 2016, 2015 and 2014 , corporate compensation and benefits includes accrued incentive bonus expense of $7.6 million, $17.4 million and $13.9 million, respectively. Share-based compensation expense was $9.7 million, $14.6 million and $26.3 million in 2016, 2015 and 2014 , respectively.

Pursuant to the agreement to sell one of our former subsidiaries, WilTel Communications Group, LLC, the responsibility for WilTel's defined benefit pension plan was retained by us.  WilTel pension expense in 2015 includes a non-cash pension settlement charge of $40.7 million related to a voluntary lump sum offer to participants of the legacy plan. See Note 20 to our consolidated financial statements for further information.

Selling, general and other expenses for the 2015 period reflects the recovery of $20.1 million in insurance payments in respect of previously expensed legal fees. Selling, general and other expenses for 2014 include a charge relating to the agreement to settle certain litigation related to the Jefferies acquisition for an aggregate payment of $70.0 million plus legal fees.


35


Other Financial Services Businesses and Investments

A summary of results of operations for other financial services businesses and investments for the three years in the period ended December 31, 2016 is as follows (in thousands):

2016

2015

2014

Net revenues

$

(46,028

)

$

524,053


$

68,241


Expenses:



Compensation and benefits

53,569


35,054


12,530


Interest

33,771


9,404


4,350


Depreciation and amortization

13,697


8,176


4,266


Selling, general and other expenses

50,782


48,279


12,377


Total expenses

151,819


100,913


33,523








Income (loss) before income taxes and income related to associated companies

(197,847

)

423,140


34,718


Income related to associated companies

124,508


81,688


104,337


Pre-tax income (loss) from continuing operations

$

(73,339

)

$

504,828


$

139,055


Our other financial services businesses and investments include the consolidated results of certain Leucadia Asset Management fund managers, the returns on our investments in these funds, the consolidated results of Foursight Capital and Chrome Capital (vehicle finance), our share of the income of Berkadia, the results of our investment in FXCM and our share of the income of HomeFed.

In January 2015, we entered into a credit agreement with FXCM, for a $300 million two-year senior secured term loan with rights to a variable proportion of certain distributions in connection with an FXCM sale of assets or certain other events, and our right to require a sale of FXCM beginning in January 2018.  FXCM is an online provider of foreign exchange trading and related services.  We accounted for our loan and rights at fair value.  During 2016 and 2015, we recognized $(54.6) million and $491.3 million, respectively, of gains (losses) from our term loan and related rights. This includes the component related to interest income, which is recorded within Principal transactions revenues.


As more fully discussed in Note 4 to our consolidated financial statements, on September 1, 2016, we, FXCM Inc. and FXCM Holdings entered into an agreement that amended the terms of our loan and associated rights. Among other changes, the amendments extended the maturity of the term loan by one year to January 2018 and gave Leucadia a 49.9% common membership interest in FXCM. We gained the ability to significantly influence FXCM through the amendments and as a result, we now account for our equity interest in FXCM under the equity method of accounting. During 2016, we recognized income related to associated companies of $1.9 million related to our common membership interest in FXCM. Given recent events, including changes in leadership within FXCM, and planned divestitures, it is difficult to anticipate whether future pre-tax income will be more or less volatile.


Excluding the FXCM revenues in 2016 and 2015 discussed above, the net revenues in other financial services businesses and investments reflect revenues of $8.6 million in 2016, $32.7 million in 2015 and $68.2 million in 2014. The year-over-year decrease in 2016 compared to 2015 primarily reflects losses on investments recorded at market value related to the Leucadia Asset Management businesses partially offset by growth in our vehicle finance businesses and at our 54 Madison real estate fund. The year-over-year decrease in 2015 compared to 2014 primarily reflects losses on investments recorded at market value related to the Leucadia Asset Management businesses partially offset by growth in our vehicle finance businesses.


All expense categories were impacted by the growth of our Leucadia Asset Management businesses and vehicle finance businesses in 2016 and 2015 as compared to the prior years. Selling, general and other expenses for 2015 also include $21.0 million of investment banking and advisory fees paid to Jefferies in connection with our entering into the agreement with FXCM, and which Jefferies recognized in net revenues.  These intercompany fees have been eliminated in our consolidated results.

For the years ended December 31, 2016, 2015 and 2014 , income related to associated companies attributable to Berkadia was $94.2 million, $78.1 million and $101.2 million, respectively. Berkadia's results were impacted by reversals of mortgage service rights


36


impairments of $35.9 million in 2016, and investment gains of $15.4 million in 2015 and $69.8 million in 2014, of which we then recorded our applicable share. As our share of profits from Berkadia are primarily taxed at the Leucadia level, the income discussed above is pre-tax. Income related to associated companies attributable to HomeFed was $23.9 million, $3.6 million and $3.2 million for the years ended December 31, 2016, 2015 and 2014 , respectively. The increase in 2016 primarily reflects a reversal of HomeFed's deferred tax valuation allowance in 2016 as HomeFed concluded that it was more likely than not that they would have future taxable income sufficient to realize their net deferred tax asset.

Other Merchant Banking Businesses and Investments

A summary of results for other merchant banking businesses and investments for the three years in the period ended December 31, 2016 is as follows (in thousands):

2016

2015

2014

Net revenues

$

571,757


$

426,731


$

538,775


Expenses:



Cost of sales

337,039


329,359


316,279


Compensation and benefits

30,923


24,657


21,917


Interest

3,105


2,586


1,554


Depreciation and amortization

39,589


30,731


12,229


Selling, general and other expenses

129,808


79,421


53,460


Total expenses

540,464


466,754


405,439


Income (loss) before income taxes and income related to associated companies

31,293


(40,023

)

133,336


Income related to associated companies

26,441


27,957


33,361


Pre-tax income (loss) from continuing operations

$

57,734


$

(12,066

)

$

166,697



Our other merchant banking operations include the consolidated results of Vitesse and Juneau (oil and gas exploration and development) and Conwed and Idaho Timber (manufacturing companies).  It also includes our equity investments in Garcadia (automobile dealerships), Linkem (fixed wireless broadband services in Italy) and Golden Queen (a gold and silver mining project), as well as our ownership of HRG shares, which is accounted for at fair value, and impacts our results through its mark-to-market adjustment reflected within net revenues. Other merchant banking operations also includes our real estate operations, substantially all of which were sold to HomeFed during March 2014 in exchange for HomeFed common shares. 


Net revenues include principal transactions related to unrealized gains (losses) of $93.2 million, $(28.0) million and $99.3 million for the years ended December 31, 2016, 2015 and 2014 , respectively, from the change in value of our investment in HRG.

We classify HRG as a trading asset for which the fair value option was elected and we reflect mark-to-market adjustments through Principal transactions revenues. In addition, net revenues for 2014 include a $22.7 million gain on the sale of an equity interest for cash proceeds of $33.0 million.

For the years ended December 31, 2016, 2015 and 2014 , net revenues for manufacturing were $415.8 million, $392.1 million and $380.5 million, respectively.  Net revenues for the years ended December 31, 2016, 2015 and 2014 for our oil and gas exploration and development businesses were $53.5 million, $54.1 million and $19.9 million, respectively. As discussed further in Note 4 to our consolidated financial statements, Vitesse uses swaps and call and put options in order to reduce exposure to future oil price fluctuations. Net unrealized gains (losses) of $(11.8) million and $7.4 million were recorded related to these options in 2016 and 2015, respectively.

The increase in total expenses in 2016 and 2015 as compared to the prior year, primarily reflects higher costs for our oil and gas exploration and development businesses. For the years ended December 31, 2016, 2015 and 2014 , Selling, general and other expenses for manufacturing were $9.2 million, $8.6 million and $8.5 million, respectively.  Selling, general and other expenses for our oil and gas exploration and development businesses were $109.1 million, $49.8 million and $15.7 million in 2016, 2015 and 2014 , respectively. The increase is primarily due to impairment charges totaling $63.8 million and $20.3 million recorded in 2016 and 2015, respectively, for the write-down of Juneau oil field assets to fair value. The 2016 impairment charge primarily


37


related to decisions made by Juneau in the third quarter to curtail development of its southern acreage in the East Eagle Ford and its Houston County acreage. A $55.0 million impairment charge was then recorded for the difference between the carrying value of that acreage and the estimated net realizable value. Selling, general and other expenses for our oil and gas exploration and development businesses for 2016 also includes the write-down of certain Juneau leases that will not benefit our business going forward, increased exploration costs and the loss on sale of an associated company.

Depreciation and amortization for the oil and gas exploration and development businesses were $30.4 million, $25.1 million and $3.9 million in 2016, 2015 and 2014 , respectively. The significant increase in 2016 and 2015 is due to increased production and additional wells compared to 2014.

For the years ended December 31, 2016, 2015 and 2014 , pre-tax profits for manufacturing were $39.8 million, $31.1 million and $31.7 million, respectively.  Pre-tax losses for the oil and gas exploration and development businesses were $90.8 million, $31.9 million and $0.8 million for 2016, 2015 and 2014 , respectively.  Pre-tax losses for the Oregon LNG project were $2.1 million, $7.5 million and $6.8 million for 2016, 2015 and 2014 , respectively.

Income related to associated companies primarily relates to our investments in Linkem and Garcadia.  For the years ended December 31, 2016, 2015 and 2014 , losses related to Linkem were $22.9 million, $15.6 million and $14.6 million, respectively, and income related to Garcadia was $52.3 million, $53.2 million and $49.4 million, respectively.

Parent Company Interest

Parent company interest totaled $58.9 million for 2016, $87.2 million for 2015 and $99.9 million for 2014.  The decline in interest expense in 2016 as compared to 2015 and 2015 as compared to 2014 is primarily due to the repayment of our 8.125% Senior Notes in September 2015.  

Income Taxes

For the year ended December 31, 2016, our provision for income taxes was $122.1 million, representing an effective tax rate of about 39%.  Our 2016 provision was increased by a $24.9 million charge related to previously issued stock awards, which increased our effective rate by 8%. The majority of the awards expired unexercised during the first quarter of 2016. The tax deductions associated with the remainder of the awards was less than the compensation cost recognized for financial reporting purposes.

For the year ended December 31, 2015, our provision for income taxes was $109.9 million, representing an effective tax rate of about 31%.  Our 2015 provision was reduced by $10.7 million, lowering our effective rate by 3%, related to benefits recorded for certain state and local net operating loss carryforwards, which are more likely than not to be realized in the future.

For the year ended December 31, 2014, our provision for income taxes was $166.0 million, representing an effective tax rate of about 44%.  Our 2014 provision was higher by $24.5 million, increasing our effective rate by 6%, related to a charge recorded to settle the litigation concerning the Jefferies acquisition, which was nondeductible.  Our 2014 provision includes an offsetting benefit of $22.2 million, or 6%, for the reduction of the valuation allowance with respect to certain net operating loss carryovers, which we now believe are more likely than not to be utilized before they expire. 


38


Discontinued Operations

Our loss from discontinued operations, net of tax and our gain (loss) on disposal from discontinued operations, net of tax include the impact of a number of changes in the mix of our businesses and investments.  During the three years ended December 31, 2016 , discontinued operations included the Lake Charles clean energy project, which we decided in September 2014 to discontinue further development, and Premier Entertainment Biloxi LLC ("Premier"), through which we had conducted our gaming entertainment operations, which was sold in July 2014..

Our loss from discontinued operations, net of income tax totaled $17.9 million in 2014.  Our 2014 loss consisted primarily of $25.4 million in losses related to our Lake Charles clean energy project, offset by income of about $6.1 million from Premier.  Our income from discontinued operations in 2016 and 2015 was not significant.

Our gain on disposal from discontinued operations, net of tax totaled $5.1 million in 2015 and $1.7 million in 2014.  Gain on disposal of discontinued operations for 2015 primarily relates to additional consideration received related to the 2012 sale of our small Caribbean-based telecommunications provider and a reversal of a legal reserve.  

For further information, see Note 29 to our consolidated financial statements.

Selected Balance Sheet Data


In addition to preparing our Consolidated Statements of Financial Condition in accordance with U.S. 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 Leucadia National Corporation shareholders' equity less Intangible assets, net and goodwill.



39


The tables below reconcile tangible capital to our U.S. GAAP balance sheet (in thousands):

December 31, 2016

Jefferies

National Beef

Other Financial Services Businesses and Investments (1)

Other Merchant Banking Businesses and Investments

Corporate liquidity and other assets, net of Corporate liabilities

Inter-company Eliminations

Total

Assets

Cash and cash equivalents

$

3,529,457


$

37,702


$

41,165


$

45,151


$

154,083


$

-


$

3,807,558


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

857,337


-


-


-


-


-


857,337


Financial instruments owned

13,809,512


1,906


188,976


761,249


524,643


-


15,286,286


Investments in managed funds

186,508


-


301,171


-


27,639


-


515,318


Loans to and investments in associated companies

653,872


-


985,780


451,117


34,329


-


2,125,098


Securities borrowed

7,743,562


-


-


-


-


-


7,743,562


Securities purchased under agreements to resell

3,862,488


-


-


-


-


-


3,862,488


Receivables

3,163,171


179,313


938,254


47,761


96,679


-


4,425,178


Property, equipment and leasehold improvements, net

265,553


385,599


4,551


31,351


22,188


-


709,242


Intangible assets, net and goodwill

1,903,335


599,794


10,549


-


-


-


2,513,678


Deferred tax asset, net

337,580


-


-


-


1,124,235


-


1,461,815


Assets held for sale

-


-


-


128,083


-


-


128,083


Other assets

679,721


294,003


117,274


563,905


63,442


(82,681

)

1,635,664


    Total Assets

36,992,096


1,498,317


2,587,720


2,028,617


2,047,238


(82,681

)

45,071,307


Liabilities

Long-term debt (2)

5,483,331


276,341


545,528


87,352


987,891


-


7,380,443


Other liabilities

26,090,308


270,184


351,505


64,315


231,775


(82,681

)

26,925,406


  Total liabilities

31,573,639


546,525


897,033


151,667


1,219,666


(82,681

)

34,305,849


Redeemable noncontrolling interests

-


321,962


551


14,296


-


-


336,809


Mandatorily redeemable convertible preferred shares

-


-


-


-


125,000


-


125,000


Noncontrolling interests

651


-


141,847


33,051


-


-


175,549


Total Leucadia National Corporation shareholders' equity

$

5,417,806


$

629,830


$

1,548,289


$

1,829,603


$

702,572


$

-


$

10,128,100


Reconciliation to Tangible Capital

Total Leucadia National Corporation shareholders' equity

$

5,417,806


$

629,830


$

1,548,289


$

1,829,603


$

702,572


$

-


$

10,128,100


Less: Intangible assets, net and goodwill

(1,903,335

)

(599,794

)

(10,549

)

-


-


-


(2,513,678

)

Tangible Capital, a non-GAAP measure

$

3,514,471


$

30,036


$

1,537,740


$

1,829,603


$

702,572


$

-


$

7,614,422



(1) Other financial services businesses and investments excludes $89.1 million December 31, 2016 of liquid marketable securities that are available for sale immediately. These liquid marketable securities are included in Corporate liquidity and other assets, net of Corporate liabilities.

(2) Long-term debt within Other financial services businesses and investments of $545.5 million at December 31, 2016 , includes $406.0 million for 54 Madison, $97.1 million for Foursight Capital and $42.4 million for Chrome Capital. Long-term debt within Other merchant banking businesses and investments of $87.4 million at December 31, 2016 , includes $55.7 million for our real estate associated with the Garcadia investment and $31.7 million for Vitesse.


40


December 31, 2015

Jefferies

National Beef

Other Financial Services Businesses and Investments (1)

Other Merchant Banking Businesses and Investments

Corporate liquidity and other assets, net of Corporate liabilities

Inter-company Eliminations

Total

Assets

Cash and cash equivalents

$

3,510,163


$

17,814


$

22,203


$

30,940


$

57,528


$

-


$

3,638,648


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

751,084


-


-


-


-


-


751,084


Financial instruments owned

16,559,116


891


647,936


639,253


653,249


-


18,500,445


Investments in managed funds

85,775


-


488,940


-


55,317


(26,312

)

603,720


Loans to and investments in associated companies

825,908


-


466,364


441,970


23,127


-


1,757,369


Securities borrowed

6,975,136


-


-


-


-


-


6,975,136


Securities purchased under agreements to resell

3,854,746


-


-


-


-


-


3,854,746


Receivables

3,023,899


208,107


463,545


51,558


83,858


-


3,830,967


Property, equipment and leasehold improvements, net

243,486


394,506


11,479


46,894


25,510


-


721,875


Intangible assets, net and goodwill

1,938,582


645,049


2,336


62,395


-


-


2,648,362


Deferred tax asset, net

320,198


-


-


-


1,255,170


-


1,575,368


Other assets

519,693


247,882


88,987


680,926


59,387


(123,411

)

1,473,464


    Total Assets

38,607,786


1,514,249


2,191,790


1,953,936


2,213,146


(149,723

)

46,331,184


Liabilities


Long-term debt (2)

5,640,722


439,299


258,350


75,389


986,822


-


7,400,582


Other liabilities

27,408,213


194,918


216,537


116,702


335,120


(123,411

)

28,148,079


  Total liabilities

33,048,935


634,217


474,887


192,091


1,321,942


(123,411

)

35,548,661



Redeemable noncontrolling interests

-


189,358


-


2,275


-


-


191,633


Mandatorily redeemable convertible preferred shares

-


-


-


-


125,000


-


125,000


Noncontrolling interests

27,468


-


14,998


48,525


-


(26,312

)

64,679


Total Leucadia National Corporation shareholders' equity

$

5,531,383


$

690,674


$

1,701,905


$

1,711,045


$

766,204


$

-


$

10,401,211


Reconciliation to Tangible Capital







Total Leucadia National Corporation shareholders' equity

$

5,531,383


$

690,674


$

1,701,905


$

1,711,045


$

766,204


$

-


$

10,401,211


Less: Intangible assets, net and goodwill

(1,938,582

)

(645,049

)

(2,336

)

(62,395

)

-


-


(2,648,362

)

Tangible Capital, a non-GAAP measure

$

3,592,801


$

45,625


$

1,699,569


$

1,648,650


$

766,204


$

-


$

7,752,849



(1) Other financial services businesses and investments excludes $366.3 million at December 31, 2015 of liquid marketable securities that are available for sale immediately. These liquid marketable securities are included in Corporate liquidity and other assets, net of Corporate liabilities.

(2) Long-term debt within Other financial services businesses and investments of $258.4 million at December 31, 2015 , includes $116.2 million for 54 Madison, $109.5 million for Foursight Capital and $32.6 million for Chrome Capital. Long-term debt within Other merchant banking businesses and investments of $75.4 million at December 31, 2015 , includes $57.8 million for our real estate associated with the Garcadia investment and $17.6 million for Vitesse.


41



The table below presents our tangible capital by significant business and investment (in thousands):

Tangible Capital as of

December 31, 2016

December 31, 2015

Jefferies

$

3,514,471


$

3,592,801


National Beef

30,036


45,625


Other Financial Services Businesses and Investments:

  Leucadia Asset Management (1)

483,687


560,251


  FXCM

500,758


625,689


  HomeFed

269,421


241,368


  Berkadia

184,443


190,986


  Foursight Capital and Chrome Capital

100,516


81,275


  Other

(1,085

)

-


    Total Other Financial Services Businesses and Investments

1,537,740


1,699,569


Other Merchant Banking Businesses and Investments:

  HRG

725,096


631,896


  Vitesse

309,837


278,833


  Juneau

159,182


179,972


  Garcadia

206,760


189,356


  Linkem

154,000


150,149


  Golden Queen

78,474


80,604


  Idaho Timber

76,551


73,057


  Conwed

100,649


42,915


  Other

19,054


21,868


Total Other Merchant Banking Businesses and Investments

1,829,603


1,648,650


Corporate liquidity and other assets, net of all Corporate liabilities including long-term debt

702,572


766,204


Total Tangible Capital (2)

$

7,614,422


$

7,752,849



(1) Leucadia Asset Management does not include $89.1 million and $366.3 million at December 31, 2016 and 2015 , respectively, of liquid marketable securities that are available for sale immediately. These liquid marketable securities are included in Corporate liquidity and other assets, net of all Corporate liabilities including long-term debt.

(2) Tangible Capital, a non-GAAP measure, is defined as Leucadia National Corporation shareholders' equity less Intangible assets, net and goodwill. See reconciliation of Tangible Capital to Leucadia National Corporation shareholders' equity in the tables above.


Liquidity and Capital Resources

Parent Company Liquidity

We are a holding company whose assets principally consist of the stock or membership interests of direct subsidiaries, cash and cash equivalents and other non-controlling investments in debt and equity securities.  We continuously evaluate the retention and disposition of our existing operations and investments and investigate possible acquisitions of new businesses in order to maximize shareholder value.  Accordingly, further acquisitions, divestitures, investments and changes in capital structure are possible.  Our principal sources of funds are available cash resources, liquid investments, public and private capital market transactions, repayment of subsidiary advances, funds distributed from subsidiaries as tax sharing payments, management and other fees, and dividends from subsidiaries, as well as dispositions of existing businesses and investments.

In addition to cash and cash equivalents, we have certain other investments that are easily convertible into cash within a relatively short period of time.  These are classified as trading assets, available for sale securities, and investments in managed funds.  Together these total $543.5 million at December 31, 2016 , primarily comprised of cash and short-term bonds and notes of the U.S. Government and its agencies, and other publicly traded debt and equity securities.  Our available liquidity, and the investment


42


income realized from cash, cash equivalents and marketable securities is used to meet our short-term recurring cash requirements, which are principally the payment of interest on our debt, dividends and corporate overhead expenses.

The parent company's primary long-term cash requirement is to make principal payments on its long-term debt ($1.0 billion principal outstanding as of December 31, 2016 ), of which $750.0 million is due in 2023 and $250.0 million in 2043.  Historically, we have used our available liquidity to make acquisitions of new businesses and other investments, but, except as disclosed in this report, the timing of any future investments and the costs thereof cannot be predicted.

From time to time in the past, we have accessed public and private credit markets and raised capital in underwritten bond financings.  The funds raised have been used by us for general corporate purposes, including for our existing businesses and new investment opportunities.  Our senior debt obligations are rated Ba1 by Moody's Investors Services and BBB- by Standard and Poor's and Fitch Ratings.  Ratings issued by bond rating agencies are subject to change at any time.

During 2016, we received $114.0 million from the redemption of Leucadia Asset Management's investment in Topwater Capital; assets under management were replaced by Jefferies investment in Topwater Capital of $114.0 million. In 2016, we received $201.4 million in distributions from National Beef.


During the year ended December 31, 2016 , we invested a net $63.0 million in 54 Madison, which was primarily used to fund real estate projects. In 2016, we purchased $33.3 million of additional Linkem convertible preferred equity and we also invested $98.8 million in add on investments in our oil and gas subsidiaries.


During 2015, we invested $279.0 million in FXCM, structured as a two-year term loan and rights to receive a variable proportion of certain distributions in connection with an FXCM sale of assets or certain other events. As more fully discussed in Note 4 to our consolidated financial statements, on September 1, 2016, we, FXCM Inc. and FXCM Holdings entered into an agreement that amended the terms of our loan and associated rights. We received $72.1 million of principal and interest from FXCM during the year ended December 31, 2016 and $144.7 million principal, interest and fees during the year ended December 31, 2015.


During the year ended December 31, 2016 , we purchased a total of 5,435,014 of our common shares for $95.0 million, at an average price per share of $17.48. The Board of Directors has authorized the purchase of up to 25,000,000 common shares, which may be made from time to time in the open market, through block trades or otherwise. As of December 31, 2016 , 16,161,588 common shares remain authorized for repurchase.


During the year ended December 31, 2016 , we paid four quarterly dividends of $0.0625 per share which aggregated $91.3 million.  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.

In February 2009, the Board of Directors authorized, from time to time, the purchase of our outstanding debt securities through cash purchases in open market transactions, privately negotiated transactions or otherwise.  Such repurchases, if any, depend upon prevailing market conditions, our liquidity requirements and other factors; such purchases may be commenced or suspended at any time without notice.

At December 31, 2016 , we had outstanding 359,425,061 common shares and 14,650,000 share-based awards that do not require the holder to pay any exercise price (potentially an aggregate of 374,075,061 outstanding common shares if all awards become outstanding common shares). The 14,650,000 share-based awards include the target number of shares under the senior executive award plan, which is more fully discussed in Note 18.

We and certain of our subsidiaries have federal income tax net operating loss carryforwards ("NOLs") of approximately $3.4 billion (net deferred tax asset of $1.1 billion) at December 31, 2016 and other tax attributes.  The amount and availability of the NOLs and other tax attributes are subject to certain qualifications, limitations and uncertainties.  In order to reduce the possibility that certain changes in ownership could impose limitations on the use of the NOLs, 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 five percent or more of the common shares and the ability of persons or entities now owning five percent 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 certain tax benefits may no longer be carried forward.  For more information about the NOLs and other tax attributes, see Note 21 to our consolidated financial statements.


43


Concentration, Liquidity and Leverage Targets

In connection with presentations made to credit rating agencies with respect to the Jefferies acquisition, we advised the agencies that we would target specific concentration, leverage and liquidity principles, expressed in the form of certain ratios and percentages, although there is no legal requirement to do so.

Concentration Target: As a diversification measure, we limit cash investments such that our single largest investment does not exceed 20% of equity excluding Jefferies, and that our next largest investment does not exceed 10% of equity excluding Jefferies, in each case measured at the time the investment was made. National Beef is our largest investment and HRG is our next largest investment.


Liquidity Target: We hold a liquidity reserve calculated as a minimum of twenty-four months of corporate expenses (excluding non-cash components), parent company interest, and dividends.  Maturities of parent company debt within the upcoming year are also included in the target; however, our next maturity is during 2023 so there is no current inclusion.  


Leverage Target: We target a maximum parent debt to stressed equity ratio of .50, with stressed equity defined as equity (excluding Jefferies) assuming the loss of our two largest investments.

These thresholds and calculations of the actual ratios and percentages are detailed below at December 31, 2016 (dollars in thousands):

Total Leucadia National Corporation shareholders' equity

$

10,128,100


Less, investment in Jefferies

(5,417,806

)

Equity excluding Jefferies

4,710,294


Less, our two largest investments:


National Beef

(629,830

)

HRG, at cost

(475,600

)

Equity in a stressed scenario

3,604,864


Less, net deferred tax asset excluding Jefferies amount

(1,124,235

)

Equity in a stressed scenario less net deferred tax asset

$

2,480,629


Balance sheet amounts:


Available liquidity

$

543,525



Parent company debt (see Note 16 to our Consolidated financial statements)

$

987,891


Ratio of parent company debt to stressed equity:


Maximum

0.50


x

Actual, equity in a stressed scenario

0.27


x

Actual, equity in a stressed scenario excluding net deferred tax asset

0.40


x

Liquidity reserve:


Minimum

$

426,000


Actual

$

543,525


Consolidated Statements of Cash Flows

As discussed above, we have historically relied on our available liquidity to meet short-term and long-term needs, and to make acquisitions of new businesses and investments.  Except as otherwise disclosed herein, our operating businesses do not generally require significant funds to support their operating activities, and we do not depend on positive cash flow from our operating segments to meet our liquidity needs.  The mix of our operating businesses and investments can change frequently as a result of acquisitions or divestitures, the timing of which is impossible to predict but which often have a significant impact on our Consolidated Statements of Cash Flows in any one period.  Further, the timing and amounts of distributions from investments in associated companies may be outside our control.  As a result, reported cash flows from operating, investing and financing activities do not generally follow any particular pattern or trend, and reported results in the most recent period should not be expected to recur in any subsequent period.


44


Net cash of $608.8 million was provided by operating activities in 2016 and net cash of $761.8 million in 2015 and $987.2 million in 2014 was used for operating activities. 

Jefferies used funds of $132.1 million, $294.5 million and $276.6 million during 2016, 2015 and 2014.  Included in these amounts are distributions received from associated companies of $38.2 million during 2016, $76.7 million during 2015 and $54.0 million during 2014.

National Beef generated funds of $484.8 million and $76.5 million during 2016 and 2015, respectively, and used funds of $55.0 million during 2014.

Within our Other Financial Services Businesses and Investments, cash of $50.0 million, $325.0 million and $345.1 million was used during 2016, 2015 and 2014 to make additional investments in the Leucadia Asset Management platform. Additionally, during 2016, cash of $257.0 million was generated from our trading portfolio and $170.0 million from our investments in managed funds related to our Leucadia Asset Management platform. We received distributions from Berkadia, an associated company, of $99.9 million during 2016, $89.4 million during 2015 and $72.9 million during 2014. Cash used for operating activities also includes net cash used of $119.8 million in 2016, $140.2 million in 2015 and $110.1 million in 2014 relating to automobile installment contracts, which is reflected in the net change in other receivables.

Within our Other Merchant Banking Businesses and Investments, manufacturing generated funds of $35.4 million in 2016, $31.2 million in 2015 and $27.1 million in 2014. In 2014, $317.5 million was used to acquire our investment in HRG. We received distributions from Garcadia, an associated company, of $51.4 million during 2016, $57.3 million during 2015 and $46.0 million during 2014. Net losses related to real estate, property and equipment, and other assets include impairment charges of $65.7 million in 2016 and $27.7 million in 2015, primarily related to Juneau.

Our cash used for operating activities also reflects the use of $7.3 million during 2015 and $40.7 million during 2014 by our discontinued operations. Additionally, during 2015, we paid $80.4 million in connection with legal settlements. The change in operating cash flows also reflects lower interest payments in 2016 as compared to 2015 and 2014.

Net cash of $639.7 million was used for investing activities in 2016 and net cash of $781.2 million in 2015 and $449.1 million in 2014 was provided by investing activities. 

Acquisitions of property, equipment and leasehold improvements, and other assets related to Jefferies include $103.3 million in 2016, $68.8 million in 2015 and $113.0 million in 2014. Jefferies made loans to and investments in associated companies of $538.2 million during 2016, $1,438.7 million during 2015 and $2,786.4 million during 2014. Jefferies received capital distributions and loan repayments from its associated companies of $689.2 million during 2016, $1,384.9 million during 2015 and $2,750.6 million during 2014.

Acquisitions of property, equipment and leasehold improvements, and other assets related to National Beef include $62.0 million in 2016, $48.6 million in 2015 and $48.2 million in 2014.

Within our Other Financial Services Businesses and Investments, acquisitions of property, equipment and leasehold improvements, and other assets were $48.6 million in 2016, $53.0 million in 2015 and $19.8 million in 2014. Advances on notes, loans and other receivables in 2015 include the investment in FXCM ($279.0 million). Collections on notes, loans and other receivables during 2016 include $24.6 million related to real estate projects in 54 Madison and $72.1 million related to FXCM. Collections on notes, loans and other receivables during 2015 primarily relate to FXCM. Loans to and investments in associated companies include $153.5 million to 54 Madison during 2016, of which $90.7 million of that was contributed from noncontrolling interests.


Within our Other Merchant Banking Businesses and Investments, acquisitions of property, equipment and leasehold improvements, and other assets reflect primarily activity in our oil and gas businesses. They totaled $104.5 million in 2016, $113.4 million in 2015 and $408.8 million in 2014. Collections on notes, loans and other receivables during 2016 include $21.2 million related to our oil and gas businesses. Loans to and investments in associated companies during 2016 include $22.5 million for Garcadia and $33.3 million for Linkem. During 2015, these include $12.5 million, including $0.4 million contributed from the noncontrolling interest, to Golden Queen and $21.2 million to Linkem. During 2014 payments included those to Golden Queen of $105.0 million, including $34.1 million contributed from the noncontrolling interest, Garcadia of $48.3 million and Linkem of $18.4 million. We also received capital distributions and loan repayments from Garcadia of $10.2 million in 2016, $2.8 million in 2015 and $3.8 million in 2014.



45


Our net cash provided by (used for) investing activities also includes the impact of acquisitions of property, equipment and leasehold improvements, and other assets within our discontinued operations of $9.4 million during 2014. Proceeds from disposal of discontinued operations, net of expenses and cash of operations sold in 2015 relates to additional consideration received in connection with the 2012 sale of our small Caribbean-based telecommunications provider and, in 2014, in connection with the sale of Premier.

Net cash of $230.9 million in 2016 and $917.8 million in 2014 was provided by financing activities and $652.0 million in 2015 was used for financing activities. 

Issuance of debt includes $299.8 million in 2016 and $681.2 million in 2014 related to Jefferies. Repayment of debt includes $373.2 million in 2016, $670.0 million in 2015 and $280.0 million in 2014 related to Jefferies. Net change in bank overdrafts of $46.5 million in 2016 related to Jefferies. Net proceeds from other secured financings include payments of $7.3 million during 2016 and proceeds of $157.1 million during 2015 and $371.1 million during 2014 related to Jefferies.


Issuance of debt for National Beef includes $135.1 million in 2014 of borrowings under its bank credit facility. National Beef reflects repayments of debt of $163.7 million in 2016, $51.7 million in 2015 and $32.8 million in 2014.


Within our Other Financial Services Businesses and Investments, borrowings include $705.4 million in 2016, $341.8 million in 2015 and $125.5 million in 2014. Their repayments of debt includes $422.5 million in 2016, $127.3 million in 2015 and $117.8 million in 2014. Net proceeds from other secured financings include proceeds of $124.0 million during 2016, $48.1 million during 2015 and $99.3 million during 2014 related to our Other Financial Services Businesses and Investments. Contributions from noncontrolling interests include $144.8 million during 2016 related to 54 Madison and $13.9 million in 2015 related to Leucadia Asset Management. 


Borrowings by our Other Merchant Banking Businesses and Investments include $14.9 million in 2016, $21.5 million in 2015 and $60.8 million in 2014. Their repayments of debt includes $8.8 million in 2015. Contributions from noncontrolling interests include $34.1 million related to Golden Queen in 2014.


At the holding company level, we include repayments of debt during 2015 of $458.6 million on the maturity of our 8.125% Senior Notes. Purchases of common shares for treasury relate to shares received from participants in our stock compensation plans and the buyback of our common shares in the open market of $66.3 million in 2016, $89.2 million in 2015 and $15.2 million in 2014.


As shown below, at December 31, 2016 , our contractual obligations totaled $11,702.3 million.

Expected Maturity Date (in millions)

Contractual Obligations

Total

2017

2018

2019
and
2020

2021
and
2022

After
2022

Indebtedness

$

7,170.7


$

420.7


$

1,172.2


$

1,627.4


$

799.0


$

3,151.4


Estimated interest expense on debt

3,161.9


391.8


345.9


537.0


387.9


1,499.3


Cattle commitments

103.8


103.8


-


-


-


-


Operating leases, net of  sublease income

928.2


86.0


83.5


131.8


111.3


515.6


Other

337.7


126.0


61.8


81.4


54.7


13.8


Total Contractual Obligations

$

11,702.3


$

1,128.3


$

1,663.4


$

2,377.6


$

1,352.9


$

5,180.1


Amounts related to our U.S. pension obligations ($77.9 million) are not included in the above table as the timing of payments is uncertain; however, we do expect to make $11.8 million of contributions to these plans in 2017.  For further information, see Note 20 in our consolidated financial statements.  In addition, the above amounts do not include liabilities for unrecognized tax benefits as the timing of payments, if any, is uncertain.  Such amounts aggregated $196.5 million at December 31, 2016 ; for more information, see Note 21 in our consolidated financial statements.


46


Our U.S. pension obligations relate to frozen defined benefit pension plans, principally the defined benefit plan of WilTel Communications Group, LLC, our former telecommunications subsidiary.  When we sold WilTel in 2005, its defined benefit pension plan was not transferred in connection with the sale.  At December 31, 2016 , we had recorded a liability of $69.2 million in our Consolidated Statement of Financial Condition for WilTel's unfunded defined benefit pension plan obligation.  This amount represents the difference between the present value of amounts owed to former employees of WilTel (referred to as the projected benefit obligation) and the market value of plan assets set aside in segregated trust accounts.  Since the benefits in this plan have been frozen, future changes to the unfunded benefit obligation are expected to principally result from benefit payments, changes in the market value of plan assets, differences between actuarial assumptions and actual experience and interest rates.

Calculations of pension expense and projected benefit obligations are prepared by actuaries based on assumptions provided by management.  These assumptions are reviewed on an annual basis, including assumptions about discount rates, interest credit rates and expected long-term rates of return on plan assets.  The timing of expected future benefit payments was used in conjunction with the Citigroup Pension Discount Curve to develop a discount rate for the WilTel plan that is representative of the high quality corporate bond market.  Holding all other assumptions constant, a 0.25% change in the discount rate would affect pension expense in 2017 by $0.2 million and the benefit obligation by $5.9 million, of which $4.5 million relates to the WilTel plan.

The deferred losses in accumulated other comprehensive income (loss) have not yet been recognized as components of net periodic pension cost in the Consolidated Statements of Operations ($58.9 million at December 31, 2016 ).  These deferred amounts primarily result from differences between the actual and assumed return on plan assets and changes in actuarial assumptions, including changes in discount rates and changes in interest credit rates.  They are amortized to expense if they exceed 10% of the greater of the projected benefit obligation or the market value of plan assets as of the beginning of the year.  The estimated net loss that will be amortized from accumulated other comprehensive income (loss) into pension expense in 2017 is $2.2 million.

The assumed long-term rates of return on plan assets are based on the investment objectives of the plans, which are more fully discussed in Note 20 in our consolidated financial statements.

Jefferies Liquidity

General

The Chief Financial Officer and Global Treasurer of Jefferies are responsible for developing and implementing liquidity, funding and capital management strategies for the Jefferies businesses.  These policies are determined by the nature and needs of day to day business operations, business opportunities, regulatory obligations, and liquidity requirements.

The actual levels of capital, total assets, and financial leverage are a function of a number of factors, including asset composition, business initiatives and opportunities, regulatory requirements and cost and availability of both long-term and short-term funding.  Jefferies has historically maintained a balance sheet consisting of a large portion of total assets in cash and liquid marketable securities, arising principally from traditional securities brokerage and trading activity.  The liquid nature of these assets provides flexibility in financing and managing Jefferies business.

A business unit level balance sheet and cash capital analysis is prepared and reviewed with senior management on a weekly basis.  As a part of this balance sheet review process, capital is allocated to all assets and gross and adjusted balance sheet limits are established.  This process ensures that the allocation of capital and costs of capital are incorporated into business decisions.  The goals of this process are to protect the Jefferies platform, enable the businesses to remain competitive, maintain the ability to manage capital proactively and hold businesses accountable for both balance sheet and capital usage.

The overall securities inventory is continually monitored by Jefferies, including the inventory turnover rate, which confirms the liquidity of overall assets. In connection with the government and agency fixed income business and Jefferies role as a primary dealer in these markets, a sizable portion of its securities inventory is comprised of U.S. government and agency securities and other G-7 government securities. For further detail on Jefferies outstanding sovereign exposure, refer to Quantitative and Qualitative Disclosures about Market Risk below.

At December 31, 2016 , our Consolidated Statement of Financial Condition includes Jefferies Level 3 trading assets that are approximately 3% of total trading assets.

Securities financing assets and liabilities include both financing for financial instruments trading activity and matched book transactions.  Matched book transactions accommodate customers, as well as obtain securities for the settlement and financing of inventory positions. 


47


The following table presents Jefferies period end balance, average balance and maximum balance at any month end within the periods presented for Securities purchased under agreements to resell and Securities sold under agreements to repurchase (in millions):

Year Ended
December 31, 2016

Year Ended
December 31, 2015

Securities purchased under agreements to resell:

Period end

$

3,862


$

3,855


Month end average

5,265


5,719


Maximum month end

7,001


7,577


Securities sold under agreements to repurchase:



Period end

$

6,792


$

9,967


Month end average

11,410


14,011


Maximum month end

16,620


18,629


Fluctuations in the balance of Jefferies repurchase agreements from period to period and intraperiod are dependent on business activity in those periods.  Additionally, the fluctuations in the balances of Jefferies securities purchased under agreements to resell are influenced in any given period by its clients' balances and desires to execute collateralized financing arrangements via the repurchase market or via other financing products.  Average balances and period end balances will fluctuate based on market and liquidity conditions and Jefferies considers the fluctuations intraperiod to be typical for the repurchase market.

Liquidity Management

The key objectives of Jefferies liquidity management framework are to support the successful execution of its business strategies while ensuring sufficient liquidity through the business cycle and during periods of financial distress.  The liquidity management policies are designed to mitigate the potential risk that adequate financing may not be accessible to service financial obligations without material franchise or business impact.

The principal elements of Jefferies liquidity management framework are the Contingency Funding Plan, the Cash Capital Policy and the assessment of Maximum Liquidity Outflow.

Contingency Funding Plan .  The Jefferies Contingency Funding Plan is based on a model of a potential liquidity contraction over a one year time period.  This incorporates potential cash outflows during a liquidity stress event, including, but not limited to, the following:

repayment of all unsecured debt maturing within one year and no incremental unsecured debt issuance;

maturity rolloff of outstanding letters of credit with no further issuance and replacement with cash collateral;

higher margin requirements than currently exist on assets on securities financing activity, including repurchase agreements;

liquidity outflows related to possible credit downgrade

lower availability of secured funding;

client cash withdrawals;

the anticipated funding of outstanding investment and loan commitments; and

certain accrued expenses and other liabilities and fixed costs.

Cash Capital Policy .  A cash capital model is maintained that measures long-term funding sources against requirements.  Sources of cash capital include equity and the noncurrent portion of long-term borrowings.  Uses of cash capital include the following:


48


illiquid assets such as equipment, goodwill, net intangible assets, exchange memberships, deferred tax assets and certain investments;

a portion of securities inventory that is not expected to be financed on a secured basis in a credit stressed environment (i.e., margin requirements); and

drawdowns of unfunded commitments. 

To ensure that Jefferies does not need to liquidate inventory in the event of a funding crises, Jefferies seeks to maintain surplus cash capital, which is reflected in the leverage ratios Jefferies maintains.

Maximum Liquidity Outflow.  Jefferies businesses are diverse, and liquidity needs are determined by many factors, including market movements, collateral requirements and client commitments, all of which can change dramatically in a difficult funding environment.  During a liquidity crisis, credit-sensitive funding, including unsecured debt and some types of secured financing agreements, may be unavailable, and the terms (e.g., interest rates, collateral provisions and tenor) or availability of other types of secured financing may change.  As a result of Jefferies policy to ensure it has sufficient funds to cover estimates of what may be needed in a liquidity crisis, Jefferies holds more cash and unencumbered securities and has greater long-term debt balances than the businesses would otherwise require.  As part of this estimation process, Jefferies calculates a Maximum Liquidity Outflow that could be experienced in a liquidity crisis.  Maximum Liquidity Outflow is based on a scenario that includes both market-wide stress and firm-specific stress.

Based on the sources and uses of liquidity calculated under the Maximum Liquidity Outflow scenarios Jefferies determines, based on its calculated surplus or deficit, additional long-term funding that may be needed versus funding through the repurchase financing market and considers any adjustments that may be necessary to Jefferies inventory balances and cash holdings.  Jefferies has sufficient excess liquidity to meet all contingent cash outflows detailed in the Maximum Liquidity Outflow.

Sources of Liquidity

Within Jefferies, the following are financial instruments that are cash and cash equivalents or are deemed by Jefferies management to be generally readily convertible into cash, marginable or accessible for liquidity purposes within a relatively short period of time, as reflected in our Consolidated Statements of Financial Condition (in thousands):

December 31, 2016

Average Balance

 Fourth Quarter 2016 (1)

December 31, 2015

Cash and cash equivalents:

Cash in banks

$

905,391


$

866,598


$

973,796


Certificate of deposit

25,000


25,000


75,000


Money market investments

2,599,066


1,535,870


2,461,367


Total cash and cash equivalents

3,529,457


2,427,468


3,510,163


Other sources of liquidity:




Debt securities owned and securities purchased under agreements to

 resell (2)

1,455,398


1,234,599


1,265,840


Other (3)(4)

318,646


604,424


163,890


Total other sources

1,774,044


1,839,023


1,429,730


Total cash and cash equivalents and other liquidity sources

$

5,303,501


$

4,266,491


$

4,939,893



(1)

Average balances are calculated based on weekly balances.

(2)

Consists of high quality sovereign government securities and reverse repurchase agreements collateralized by U.S. government securities and other high quality sovereign government securities; deposits with a central bank within the European Economic Area, Canada, Australia, Japan, Switzerland or the U.S.; and securities issued by a designated multilateral development bank and reverse repurchase agreements with underlying collateral comprised of these securities.


49


(3)

Other includes unencumbered inventory representing an estimate of the amount of additional secured financing that could be reasonably expected to be obtained from financial instruments owned that are currently not pledged after considering reasonable financing haircuts.

(4)

Other sources of liquidity has been reduced by $141.2 million from what was previously disclosed, to reflect adjustments for certain securities that have subsequently been identified to have been encumbered.

In addition to the cash balances and liquidity pool presented above, the majority of trading assets and liabilities are actively traded and readily marketable.  Repurchase financing can be readily obtained for approximately 75.4% of Jefferies inventory at haircuts of 10% or less, which reflects the liquidity of the inventory.  In addition, as a matter of Jefferies policy, all of these assets have internal capital assessed, which is in addition to the funding haircuts provided in the securities finance markets.  Additionally, certain of Jefferies trading assets primarily consisting of bank loans, consumer loans and investments are predominantly funded by Jefferies long-term capital.  Under Jefferies cash capital policy, capital allocation levels are modeled that are more stringent than the haircuts used in the market for secured funding; and surplus capital is maintained at these more stringent levels. Jefferies continually assesses the liquidity of its inventory based on the level at which Jefferies could obtain financing in the marketplace for a given asset.  Assets are considered to be liquid if financing can be obtained in the repurchase market or the securities lending market at collateral haircut levels of 10% or less.  The following summarizes Jefferies trading assets by asset class that are considered to be of a liquid nature and the amount of such assets that have not been pledged as collateral as reflected in the Consolidated Statements of Financial Condition (in thousands):

December 31, 2016

December 31, 2015

Liquid Financial

 Instruments

Unencumbered

Liquid Financial

 Instruments (2)

Liquid Financial

 Instruments

Unencumbered

Liquid Financial

 Instruments (2)

Corporate equity securities

$

1,815,819


$

280,733


$

1,881,419


$

268,664


Corporate debt securities

1,818,150


-


1,999,162


89,230


U.S. Government, agency and municipal securities

3,157,737


600,456


2,987,784


317,518


Other sovereign obligations

2,258,035


854,942


2,444,339


1,026,842


Agency mortgage-backed securities (1)

1,090,391


-


3,371,680


-


Loans and other receivables

274,842


-


-


-


$

10,414,974


$

1,736,131


$

12,684,384


$

1,702,254


(1)

Consists solely of agency mortgage-backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae.  These securities include pass-through securities, securities backed by adjustable rate mortgages ("ARMs"), collateralized mortgage obligations, commercial mortgage-backed securities and interest- and principal-only securities.

(2)

Unencumbered liquid balances represent assets that can be sold or used as collateral for a loan, but have not been.

In addition to being able to be readily financed at modest haircut levels, it is estimated that each of the individual securities within each asset class above could be sold into the market and converted into cash within three business days under normal market conditions, assuming that the entire portfolio of a given asset class was not simultaneously liquidated.  There are no restrictions on the unencumbered liquid securities, nor have they been pledged as collateral.

Sources of Funding

Secured Financing

Readily available secured funding is used to finance Jefferies financial instruments inventory.  The ability of Jefferies to support increases in total assets is largely a function of the ability to obtain short and intermediate term secured funding, primarily through securities financing transactions.  Repurchase or reverse repurchase agreements (collectively "repos"), respectively, are used to finance a portion of long inventory and cover a portion of short inventory through pledging and borrowing securities.  Approximately 75.7% of Jefferies cash and non-cash repurchase financing activities use collateral that is considered eligible collateral by central clearing corporations.  Central clearing corporations are situated between participating members who borrow cash and lend securities (or vice versa); accordingly repo participants contract with the central clearing corporation and not one another individually.  Therefore, counterparty credit risk is borne by the central clearing corporation which mitigates the risk through initial margin demands and variation margin calls from repo participants.  The comparatively large proportion of Jefferies total repo


50


activity that is eligible for central clearing reflects the high quality and liquid composition of its trading inventory.  For those asset classes not eligible for central clearinghouse financing, bi-lateral financings are sought on an extended term basis and the tenor of Jefferies repurchase and reverse repurchase agreements generally exceeds the expected holding period of the assets Jefferies is financing. Weighted average maturity of repurchase agreements for non-clearing corporation eligible funded inventory is approximately 3 months. 

Jefferies ability to finance inventory via central clearinghouses and bi-lateral arrangements is augmented by Jefferies ability to draw bank loans on an uncommitted basis under various banking arrangements.  As of December 31, 2016 , short-term borrowings, which must be repaid within one year or less and include bank loans and overdrafts, borrowings under revolving credit facilities, structured notes and a demand loan margin financing facility, totaled $525.8 million.  Interest under the bank lines is generally at a spread over the federal funds rate.  Letters of credit are used in the normal course of business mostly to satisfy various collateral requirements in favor of exchanges in lieu of depositing cash or securities.  Average daily short-term borrowings for Jefferies for 2016 and 2015 were $399.6 million and $65.3 million, respectively.

Jefferies short-term borrowings include the following facilities:


Demand Loan Facility . On February 19, 2016, Jefferies entered into a demand loan margin financing facility ("Demand Loan Facility") in a maximum principal amount of $25.0 million to satisfy certain of its margin obligations. Interest is based on an annual rate equal to the weighted average LIBOR as defined in the Demand Loan Facility agreement plus 150 basis points. The Demand Loan Facility was terminated during the fourth quarter of 2016.


Secured Revolving Loan Facility. On October 29, 2015, Jefferies entered into a secured revolving loan facility ("First Secured Revolving Loan Facility") whereby the lender agrees to make available a revolving loan facility in a maximum principal amount of $50.0 million in U.S. dollars to purchase eligible receivables that meet certain requirements as defined in the First Secured Revolving Loan Facility agreement. Interest is based on an annual rate equal to the lesser of the LIBOR rate plus three and three-quarters percent or the maximum rate as defined in the First Secured Revolving Loan Facility agreement. On December 14, 2015, Jefferies entered into a second secured revolving loan facility ("Second Revolving Loan Facility", and together with the First Secured Revolving Loan Facility, "Secured Revolving Loan Facilities") whereby the lender agrees to make available a revolving loan facility in a maximum principal amount of $50.0 million in U.S. dollars to purchase eligible receivables that meet certain requirements as defined in the Second Secured Revolving Loan Facility agreement. Interest is based on an annual rate equal to the lesser of the LIBOR rate plus four and one-quarter percent or the maximum rate as defined in the Second Secured Revolving Loan Facility agreement.


Intraday Credit Facility. The Bank of New York Mellon agrees to make revolving intraday credit advances ("Intraday Credit Facility") for an aggregate committed amount of $250.0 million in U.S. dollars. The Intraday Credit Facility contains a financial covenant, which includes a minimum regulatory net capital requirement. Interest is based on the higher of the Federal funds effective rate plus 0.5% or the prime rate. At December 31, 2016 , Jefferies was in compliance

with all debt covenants under the Intraday Credit Facility.

In addition to the above financing arrangements, Jefferies issues notes backed by eligible collateral under a master repurchase agreement. The outstanding amount of the notes issued under the program was $718.0 million in aggregate, which is presented within Other secured financings in the Consolidated Statement of Financial Condition at December 31, 2016 .  Of the $718.0 million aggregate notes, $60.0 million matured in December 2016, $170.0 million matures in May 2018 (redeemable at the option of the noteholders as of November 30, 2016), $218.3 million matures in February 2017, and $201.6 million matures in May 2017, all bearing interest at a spread over one month LIBOR. The remaining $68.1 million matured in January 2017, and bore interest at a spread over three month LIBOR. 

Long-Term Debt

Jefferies long-term debt reflected in the Consolidated Statement of Financial Condition at December 31, 2016 is $5.5 billion.  Jefferies long-term debt has a weighted average maturity of 7 years.  Jefferies next scheduled maturity is the $800.0 million principal amount of 5.125% Senior Notes that mature in April 2018.


51


Jefferies long-term debt ratings are as follows:

Rating

Outlook

Moody's Investors Service

Baa3

Stable

Standard and Poor's

BBB-

Stable

Fitch Ratings

BBB-

Stable

Jefferies access to external financings to finance its day to day operations, as well as the cost of that financing, is dependent upon various factors, including its debt ratings.  Jefferies current debt ratings are dependent upon many factors, including industry dynamics, operating and economic environment, operating results, operating margins, earnings trend and volatility, balance sheet composition, liquidity and liquidity management, capital structure, overall risk management, business diversification and market share and competitive position in the markets in which it operates.  Deteriorations in any of these factors could impact Jefferies credit ratings.  While certain aspects of a credit rating downgrade are quantifiable pursuant to contractual provisions, the impact on its business and trading results in future periods is inherently uncertain and depends on a number of factors, including the magnitude of the downgrade, the behavior of individual clients and future mitigating action taken by Jefferies.

In connection with certain over-the-counter derivative contract arrangements and certain other trading arrangements, Jefferies may be required to provide additional collateral to counterparties, exchanges and clearing organizations in the event of a credit rating downgrade.  The amount of additional collateral that could be called by counterparties, exchanges and clearing organizations under the terms of such agreements in the event of a downgrade of Jefferies long-term credit rating below investment grade was $51.4 million.  For certain foreign clearing organizations credit rating is only one of several factors employed in determining collateral that could be called.  The above represents management's best estimate for additional collateral to be called in the event of credit rating downgrade.  The impact of additional collateral requirements is considered in Jefferies Contingency Funding Plan and calculation of Maximum Liquidity Outflow, as described above.

Ratings issued by credit rating agencies are subject to change at any time.

Net Capital

Jefferies operates broker-dealers registered with the SEC and member firms of FINRA.  Jefferies LLC and Jefferies Execution are subject to the Securities and Exchange Commission Uniform Net Capital Rule ("Rule 15c3-1"), which requires the maintenance of minimum net capital and have elected to calculate minimum capital requirements under the alternative method as permitted by Rule 15c3-1 in calculating net capital. Jefferies, as a dually registered U.S. broker-dealer and FCM, is subject to Rule 1.17 of the CFTC which sets forth minimum financial requirements. The minimum net capital requirement in determining excess net capital for a dually-registered U.S. broker-dealer and FCM is equal to the greater of the requirement under Rule 15c3-1 or CFTC Rule 1.17.

Jefferies LLC and Jefferies Execution's net capital and excess net capital were as follows (in thousands):

Net Capital

Excess Net Capital

Jefferies LLC

$

1,467,729


$

1,398,748


Jefferies Execution

8,260


8,010


FINRA is the designated self-regulatory organization ("DSRO") for Jefferies U.S. broker-dealers and the NFA is the DSRO for Jefferies as an FCM.


Certain other U.S. and non-U.S. subsidiaries of Jefferies are subject to capital adequacy requirements as prescribed by the regulatory authorities in their respective jurisdictions, including Jefferies International Limited which is subject to the regulatory supervision and requirements of the Financial Conduct Authority in the U.K.  The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") was signed into law on July 21, 2010.  The Dodd-Frank Act contains provisions that require the registration of all swap dealers, major swap participants, security-based swap dealers, and/or major security-based swap participants.  While entities that register under these provisions will be subject to regulatory capital requirements, these regulatory capital requirements have not yet been finalized.  Jefferies expects that these provisions will result in modifications to the regulatory


52


capital requirements of some of its entities, and will result in some of its other entities becoming subject to regulatory capital requirements for the first time, including Jefferies Financial Services, Inc., which registered as a swap dealer with the CFTC during January 2013 and Jefferies Financial Products LLC, which registered during August 2014.

The regulatory capital requirements referred to above may restrict Jefferies ability to withdraw capital from its regulated subsidiaries. Some of our other consolidated subsidiaries also have credit agreements which may restrict the payment of cash dividends, or the ability to make loans or advances to the parent company.

Off-Balance Sheet Arrangements

As shown below, at December 31, 2016 , our commitments and guarantees, substantially all of which related to Jefferies, totaled $29,130.0 million.

Expected Maturity Date (in millions)

Commitments and Guarantees

Total

2017

2018

2019
and
2020

2021
and
2022

After
2022

Equity commitments

$

470.8


$

192.4


$

22.1


$

13.0


$

-


$

243.3


Loan commitments

447.8


315.3


16.9


71.6


44.0


-


Underwriting commitments

349.4


349.4


-


-


-


-


Forward starting reverse repos

4,668.7


4,668.7


-


-


-


-


Forward starting repos

2,539.2


2,539.2


-


-


-


-


Other unfunded commitments

88.8


-


37.0


4.8


33.8


13.2


Derivative contracts (1):

Non-credit related

20,080.8


18,838.6


820.4


-


-


421.8


Credit related

437.6


-


52.2


24.6


360.8


-


Standby letters of credit

46.9


45.8


-


-


-


1.1


Total Commitments and Guarantees

$

29,130.0


$

26,949.4


$

948.6


$

114.0


$

438.6


$

679.4


(1) Certain of Jefferies derivative contracts meet the definition of a guarantee and are therefore included in the above table. For additional information on commitments, see Note 25 in our consolidated financial statements.

We have agreed to reimburse Berkshire Hathaway for up to one-half of any losses incurred under a $2.5 billion surety policy securing outstanding commercial paper issued by an affiliate of Berkadia.  As of December 31, 2016 , the aggregate amount of commercial paper outstanding was $1.47 billion.  This commitment is not included in the table above as the timing of payments, if any, is uncertain.

In the normal course of business Jefferies and certain other subsidiaries engage in other off-balance sheet arrangements, including derivative contracts.  Neither derivatives' notional amounts nor underlying instrument values are reflected as assets or liabilities in the Consolidated Statements of Financial Condition.  Rather, the fair value of derivative contracts are reported in the Consolidated Statements of Financial Condition as Trading assets – Derivative contracts or Trading Liabilities – Derivative contracts as applicable.  Derivative contracts are reflected net of cash paid or received pursuant to credit support agreements and are reported on a net by counterparty basis when a legal right of offset exists under an enforceable master netting agreement.  For additional information about our accounting policies and our derivative activities see Notes 2, 4 and 5 in our consolidated financial statements.

We are routinely involved with variable interest entities ("VIEs") in the normal course of business. At December 31, 2016 , we did not have any commitments to purchase assets from our VIEs.  For additional information regarding VIEs, see Notes 7 and 9 in our consolidated financial statements.


53


Critical Accounting Estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires us to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes.  Actual results could significantly differ from those estimates.  We believe that the following discussion addresses our most critical accounting policies, which are those that are important to the presentation of our financial condition and results of operations and require our most difficult, subjective and complex judgments.

Income Taxes – We record a valuation allowance to reduce our net deferred tax asset to the net amount that is more likely than not to be realized.  If in the future we determine that it is more likely than not that we will be able to realize our net deferred tax asset in excess of our net recorded amount, an adjustment to increase the net deferred tax asset would increase income in such period.  If in the future we were to determine that we would not be able to realize all or part of its recorded net deferred tax asset, an adjustment to decrease the net deferred tax asset would be charged to income in such period.  We are required to consider all available evidence, both positive and negative, and to weigh the evidence when determining whether a valuation allowance is required and the amount of such valuation allowance.  Generally, greater weight is required to be placed on objectively verifiable evidence when making this assessment, in particular on recent historical operating results.

Our estimate of future taxable income considers all available evidence, both positive and negative, about our operating businesses and investments, includes an aggregation of individual projections for each significant operating business and investment, estimated apportionment factors for state and local taxing jurisdictions and includes all future years that we estimate we will have available NOLs. As discussed further in Note 21, Federal NOLs begin to expire in 2022, with a substantial amount expiring between 2022 and 2025.  We believe that our estimate of future taxable income is reasonable but inherently uncertain, and if our current or future operations and investments generate taxable income different than the projected amounts, further adjustments to the valuation allowance are possible.  The current balance of the deferred tax valuation allowance principally reserves for NOLs of certain subsidiaries that are not available to offset income generated by other members of the consolidated tax return group.

We also 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 could be significant to our Consolidated Statement of Financial Condition or results of operations.

Fair Value of Financial Instruments – Trading assets and trading liabilities are recorded at fair value, either as required by accounting pronouncements or through the fair value option election.  Trading assets and trading liabilities include Jefferies trading activities and financial instruments of other consolidated entities that are accounted for through the fair value option election.  Gains and losses on trading assets and trading liabilities are recognized in our Consolidated Statements of Operations.  Available for sale securities are reflected at fair value, with unrealized gains and losses reflected as a separate component of equity, net of taxes.  When sold, realized gains and losses on available for sale securities are reflected in the caption Net realized securities gains.  Fair value 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).

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 fair values for which have been derived using model inputs that 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.


54


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.

Fair value is a market based measure; therefore, when market observable inputs are not available, our judgment is applied to reflect those judgments that a market participant would use in valuing the same asset or liability.  The availability of observable inputs can vary for different products.  We use prices and inputs that are current as of the measurement date even in periods of market disruption or illiquidity.  The valuation of financial instruments classified in Level 3 of the fair value hierarchy involves the greatest amount of management judgment.

Jefferies Independent Price Verification Group, independent of its trading function, plays an important role in determining that financial instruments are appropriately valued and that fair value measurements are reliable.  This is particularly important where prices or valuations that require inputs are less observable.  In the event that observable inputs are not available, the control processes are designed to assure that the valuation approach utilized is appropriate and consistently applied and that the assumptions are reasonable.  Where a pricing model is used to determine fair value, these control processes include reviews of the pricing model's theoretical soundness and appropriateness by risk management personnel with relevant expertise who are independent from the trading desks.  In addition, recently executed comparable transactions and other observable market data are considered for purposes of validating assumptions underlying the model.

We also engage independent valuation firms to assist management in estimating the fair value of certain of our investments including the fair value of our loan to FXCM. Our estimate of fair value was determined using valuation models with inputs including management's assumptions concerning the amount and timing of expected cash flows, the loan's implied credit rating and effective yield. We also engaged an independent valuation firm to assist management in estimating the fair value of our equity interest in FXCM on September 1, 2016. Our estimate of fair value was determined using valuation models with inputs including management's assumptions concerning the implied total equity value, based primarily on the publicly traded FXCM Inc. stock price; volatility; risk-free rate; and term.

For further information on the fair value definition, Level 1, Level 2, Level 3 and related valuation techniques, see Notes 2 and 4 in our consolidated financial statements.

Impairment of Long-Lived Assets – We evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate, in management's judgment, that the carrying value of such assets may not be recoverable.  When testing for impairment, we group our long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (or asset group).  The determination of whether an asset group is recoverable is based on management's estimate of undiscounted future cash flows directly attributable to the asset group as compared to its carrying value.  If the carrying amount of the asset group is greater than the undiscounted cash flows, an impairment loss would be recognized for the amount by which the carrying amount of the asset group exceeds its estimated fair value.

We recorded impairment charges of $71.1 million in 2016, $27.7 million in 2015 and $3.2 million in 2014.  $56.3 million of the 2016 charge related to write-downs of Juneau's unproved oil and gas properties and $7.5 million related to the write-down of Juneau assets held for sale to fair value. In the third quarter of 2016, Juneau curtailed development of its southern acreage in the East Eagle Ford and its Houston County acreage. As a result, an impairment was recorded for the difference between the carrying value and the estimated net realizable value of the acreage. $20.3 million of the 2015 charge related to Juneau's oil and gas properties which were impacted by the decline in oil prices.

Impairment of Equity Method Investments – We evaluate equity method investments for impairment when operating losses or other factors may indicate a decrease in value which is other than temporary.  We consider a variety of factors including economic conditions nationally and in their geographic areas of operation, adverse changes in the industry in which they operate, declines in business prospects, deterioration in earnings, increasing costs of operations and other relevant factors specific to the investee.  Whenever we believe conditions or events indicate that one of these investments might be significantly impaired, we obtain from such investee updated cash flow projections and impairment analyses of the investee assets.  We use this information and, together with discussions with the investee's management, evaluate if the book value of its investment exceeds its fair value, and if so and the situation is deemed other than temporary, record an impairment charge.

Goodwill – We allocate the acquisition cost of consolidated businesses to the specific tangible and intangible assets acquired and liabilities assumed based upon their fair values.  Significant judgments and estimates are often made by management to determine these values, and may include the use of appraisals, consideration of market quotes for similar transactions, use of discounted cash flow techniques or consideration of other information we believe to be relevant.  Any excess acquisition cost over the fair values


55


of the net assets acquired is recorded as goodwill, which is not amortized to expense. Substantially all of our goodwill was recognized in connection with the Jefferies acquisition.

At least annually, and more frequently if warranted, we assess whether goodwill has been impaired at the reporting unit level.  In testing for goodwill impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we conclude that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is not necessary. If we conclude otherwise, we are required to perform the two-step quantitative impairment test. In the first step, the fair value of each reporting unit is compared with its carrying value, including goodwill and allocated intangible assets. If the fair value is in excess of the carrying value, the goodwill for the reporting unit is considered not to be impaired. If the fair value is less than the carrying value then a second step is performed in order to measure the amount of the impairment loss, if any, which is based on comparing the implied fair value of the reporting unit's goodwill to the carrying value.

The fair values are based on valuation techniques that we believe market participants would use, although the valuation process requires significant judgment and often involves the use of significant estimates and assumptions.  The methodologies we utilize in estimating fair value include market capitalization, price-to-book multiples of comparable exchange traded companies, multiples of mergers and acquisitions of similar businesses and/or projected cash flows.  In addition, as the fair values determined under a market approach represent a noncontrolling interest, we applied a control premium to arrive at the estimated fair value of our reporting units on a controlling basis. The estimates and assumptions used in determining fair value could have a significant effect on whether or not an impairment charge is recorded and the magnitude of such a charge.  Adverse market or economic events could result in impairment charges in future periods.

An independent valuation specialist was engaged to assist with the valuation process relating to Jefferies for our annual goodwill impairment test as of August 1, 2016.  The results of this test indicated the fair value of Jefferies was in excess of the carrying value. However, the valuation methodology is sensitive to comparable company multiples and management's forecasts of future profitability, which comes with a level of uncertainty regarding U.S. and global economic conditions, trading volumes and equity and debt capital market transaction levels. The fair value of our reporting units, including Jefferies, is also impacted by our overall market capitalization. If the future were to differ adversely from these assumptions or there was a sustained decline in our market capitalization, the estimated fair value of Jefferies may decline and result in an impairment. 

During the fourth quarter of 2014, Jefferies decided to pursue strategic alternatives for its Futures business and decided to liquidate its International Asset Management business.  In connection with these two events, Jefferies recognized goodwill impairment losses of $54.0 million.  As U.S. GAAP requires that our assessment be performed at our reporting unit level, and the estimated fair value of Jefferies exceeded its carrying value, we did not recognize any impairment losses related to Jefferies.  The $54.0 million impairment loss recorded by Jefferies is a difference between its stand-alone financial statements and the Jefferies results included in our consolidated financial statements.

Intangible Assets – Intangible assets deemed to have finite lives are generally amortized on a straight line basis over their estimated useful lives, where the useful life is the period over which the asset is expected to contribute directly, or indirectly, to our future cash flows.  Intangible assets are reviewed for impairment on an interim basis when certain events or circumstances exist.  If future undiscounted cash flows are estimated to be less than the carrying amounts of the asset groups used to generate those cash flows in subsequent reporting periods, particularly for those with large investments in amortizable intangible assets, impairment charges would have to be recorded.

An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when certain events or circumstances exist indicating an assessment for impairment is necessary.  Impairment exists when the carrying amount exceeds its fair value.  Fair value is determined using valuation techniques consistent with what a market participant would use. All of our indefinite-lived intangible assets were recognized in connection with the Jefferies acquisition, which consists of exchange and clearing organization membership interests and registrations. Our annual impairment testing date is as of August 1, 2016.

Compensation and Benefits – A portion of Jefferies compensation and benefits represents discretionary bonuses, which are finalized at year end.  In addition to the level of net revenues, Jefferies overall compensation expense in any given year is influenced by prevailing labor markets, revenue mix, profitability, individual and business performance metrics, and use of share-based compensation programs.  We believe the most appropriate way to allocate Jefferies estimated annual total compensation among interim periods is in proportion to projected net revenues earned.  Consequently, during the year we accrue Jefferies compensation and benefits based on annual targeted compensation ratios, taking into account the mix of its revenues and the timing of expense recognition.


56


Contingencies In the normal course of business, we have been named, from time to time, as a defendant in legal and regulatory proceedings.  We are also involved, from time to time, in other exams, investigations and similar reviews (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 when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated.  If the reasonable estimate of a probable loss is a range, we accrue the most likely amount of such loss, and if such amount is not determinable, then we accrue the minimum in the range as the loss accrual.  The determination of the outcome and loss estimates requires significant judgment on the part of management, can be highly subjective and is subject to significant change with the passage of time as more information becomes available.  Estimating the ultimate impact of litigation matters is inherently uncertain, in particular because the ultimate outcome will rest on events and decisions of others that may not be within our power to control.  We do not believe that any of our current litigation will have a significant adverse effect on our consolidated financial position, results of operations or liquidity; however, if amounts paid at the resolution of litigation are in excess of recorded reserve amounts, the excess could be significant in relation to results of operations for that period.  For further information, see Note 25 in our consolidated financial statements.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk .

The following includes "forward-looking statements" that involve risk and uncertainties.  Actual results could differ materially from those projected in the forward-looking statements.  The discussion of risk is presented separately for Jefferies and the balance of our company.  Exclusive of Jefferies, our market risk arises principally from interest rate risk related to our financial instruments owned and equity price risk.

As more fully discussed in Note 4 to our consolidated financial statements, we own approximately 46.6 million common shares of HRG, representing approximately 23% of HRG's outstanding common shares, which are accounted for under the fair value option and included within Trading Assets at fair value of $725.1 million at December 31, 2016 . Assuming a decline of 10% in market prices, the value of our investment in HRG could decrease by approximately $72.5 million.

The potential for changes in the value of financial instruments is referred to as market risk.  Jefferies market risk generally represents the risk of loss that may result from a change in the value of a financial instrument as a result of fluctuations in interest rates, credit spreads, equity prices, commodity prices and foreign exchange rates, along with the level of volatility.  Interest rate risks result primarily from exposure to changes in the yield curve, the volatility of interest rates, and credit spreads.  Equity price risks result from exposure to changes in prices and volatilities of individual equities, equity baskets and equity indices.  Commodity price risks result from exposure to the changes in prices and volatilities of individual commodities, commodity baskets and commodity indices.  Market risk arises from market making, proprietary trading, underwriting, specialist and investing activities.  Jefferies seeks to manage its exposure to market risk by diversifying exposures, controlling position sizes, and establishing economic hedges in related securities or derivatives.  Due to imperfections in correlations, gains and losses can occur even for positions that are hedged.  Position limits in trading and inventory accounts are established and monitored on an ongoing basis.  Each day, consolidated position and exposure reports are prepared and distributed to various levels of management, which enable management to monitor inventory levels and results of the trading groups.

Value-at-Risk

Within Jefferies, Value-at-Risk (VaR) is used as a measurement of market risk using a model that simulates revenue and loss distributions on substantially all financial instruments by applying historical market changes to the current portfolio.  Using the results of this simulation, VaR measures the potential loss in value of our financial instruments over a specified time horizon at a given confidence level.  Jefferies calculates a one-day VaR using a one year look-back period measured at a 95% confidence level.

As with all measures of VaR, the estimate has inherent limitations due to the assumption that historical changes in market conditions are representative of the future.  Furthermore, the VaR model measures the risk of a current static position over a one-day horizon and might not capture the market risk of positions that cannot be liquidated or offset with hedges in a one-day period.  Published VaR results reflect past trading positions while future risk depends on future positions.

While Jefferies believes the assumptions and inputs in its risk model are reasonable, Jefferies could incur losses greater than the reported VaR because the historical market prices and rates changes may not be an accurate measure of future market events and conditions.  Consequently, this VaR estimate is only one of a number of tools Jefferies uses in its daily risk management activities. During the first quarter of 2016, Jefferies experienced sizable losses given the exceptionally volatile and turbulent market, which were more dramatic than the estimates included in its VaR which are based on historical observations. When comparing the VaR


57


numbers to those of other firms, it is important to remember that different methodologies and assumptions could produce significantly different results.

The following table illustrates each separate component of VaR for each component of market risk by interest rate, equity, currency and commodity products, as well as for Jefferies overall trading positions using the past 365 days of historical data.  The aggregated VaR presented here is less than the sum of the individual components (i.e., interest rate risk, foreign exchange rate risk, equity risk and commodity price risk) due to the benefit of diversification among the four risk categories.  Diversification effect equals the difference between aggregated VaR and the sum of VaRs for the four risk categories and arises because the market risk categories are not perfectly correlated.  Since we consolidate Jefferies on a one month lag, all amounts reported are for Jefferies annual fiscal periods.

Daily VaR (1)

Value-at-Risk In Trading Portfolios

Daily VaR (1)

Value-at-Risk In Trading Portfolios

(In millions)

Risk Categories

VaR at November 30, 2016


Daily VaR for the

Year Ended

 November 30, 2016

VaR at November 30, 2015


Daily VaR for the

Year Ended

 November 30, 2015

Average

High

Low

Average

High

Low

Interest Rates

$

5.82


$

4.96


$

6.99


$

3.43


$

5.01


$

5.84


$

8.06


$

4.19


Equity Prices

6.71


5.42


9.55


2.60


6.69


9.79


13.61


5.39


Currency Rates

0.19


0.41


3.01


0.07


0.30


0.46


3.32


0.12


Commodity Prices

0.51


0.84


2.44


0.31


0.82


0.57


1.62


0.04


Diversification Effect (2)

(4.79

)

(3.72

)

N/A


N/A


(5.09

)

(4.27

)

N/A


N/A


Firmwide

$

8.44


$

7.91


$

11.40


$

4.30


$

7.73


$

12.39


$

17.75


$

6.35


(1)

For the VaR numbers reported above, a one-day time horizon, with a one year look-back period, and a 95% confidence level were used.

(2)

The diversification effect is not applicable for the maximum and minimum VaR values as the Jefferies VaR and VaR values for the four risk categories might have occurred on different days during the period.

Average daily VaR decreased to $7.91 million for the year ended November 30, 2016 from $12.39 million for the year ended November 30, 2015, a 36.2% decrease. The decrease was primarily driven by lower block trading activity and firmwide defensive positioning resulting in lower equity risk and fixed income exposures, partially offset by a lower diversification benefit. In addition, VaR increased from $7.73 million at November 30, 2015 to $8.44 million at November 30, 2016. Excluding the investment in KCG, average VaR decreased to $5.77 million for the year ended November 30, 2016 from $9.97 million in the year ended November 30, 2015.

The primary method used to test the efficacy of the VaR model is to compare actual daily net revenue for those positions included in the VaR calculation with the daily VaR estimate.  This evaluation is performed at various levels of the trading portfolio, from the holding company level down to specific business lines.  For the VaR model, trading related revenue is defined as principal transaction revenue, trading related commissions, revenue from securitization activities and net interest income.  For a 95% confidence one day VaR model (i.e., no intra-day trading), assuming current changes in market value are consistent with the historical changes used in the calculation, net trading losses would not be expected to exceed the VaR estimates more than twelve times on an annual basis (i.e., once in every 20 days).  During the year ended November 30, 2016, results of the evaluation at the aggregate level demonstrated 3 days when the net trading loss exceeded the 95% one day VaR.


58


Certain individual positions within financial instruments are not included in the VaR model because VaR is not the most appropriate measure of risk.  Accordingly, Jefferies Risk Management has additional procedures in place to assure that the level of potential loss that would arise from market movements are within acceptable levels.  Such procedures include performing stress tests, monitoring concentration risk and tracking price target/stop loss levels.  The table below presents the potential reduction in net income associated with a 10% stress of or the sensitivity to a 10% stress of the fair value of the positions that are not included in the VaR model at November 30, 2016 (in thousands):

10% Sensitivity

Private investments

$

20,980


Corporate debt securities in default

5,040


Trade claims

491


Excluding trading losses associated with the daily marking to market of the investment in KCG, there were 21 days with trading losses out of a total of 253 trading days in the year ended November 30, 2016. Including these losses, there were 38 days with trading losses.

Scenario Analysis and Stress Tests

While VaR measures potential losses due to adverse changes in historical market prices and rates, Jefferies uses stress testing to analyze the potential impact of specific events or moderate or extreme market moves on its current portfolio both firm wide and within business segments.  Stress scenarios comprise both historical market price and rate changes and hypothetical market environments, and generally involve simultaneous changes of many risk factors.  Indicative market changes in Jefferies scenarios include, but are not limited to, a large widening of credit spreads, a substantial decline in equities markets, significant moves in selected emerging markets, large moves in interest rates, changes in the shape of the yield curve and large moves in European markets.  In addition, Jefferies also performs ad hoc stress tests and adds new scenarios as market conditions dictate.  Because Jefferies stress scenarios are meant to reflect market moves that occur over a period of time, its estimates of potential loss assume some level of position reduction for liquid positions.  Unlike Jefferies VaR, which measures potential losses within a given confidence interval, stress scenarios do not have an associated implied probability; rather, stress testing is used to estimate the potential loss from market moves that tend to be larger than those embedded in the VaR calculation.

Stress testing is performed and reported regularly as part of the risk management process.  Stress testing is used to assess Jefferies aggregate risk position as well as for limit setting and risk/reward analysis.

Counterparty Credit Risk and Issuer Country Exposure

Counterparty Credit Risk

Credit risk is the risk of loss due to adverse changes in a counterparty's credit worthiness or its ability or willingness to meet its financial obligations in accordance with the terms and conditions of a financial contract. Jefferies is exposed to credit risk as trading counterparty to other broker-dealers and customers, as a direct lender and through extending loan commitments, as a holder of securities and as a member of exchanges and clearing organizations.

It is critical to Jefferies financial soundness and profitability that Jefferies properly and effectively identify, assess, monitor and manage the various credit and counterparty risks inherent in its businesses.  Credit is extended to counterparties in a controlled manner in order to generate acceptable returns, whether such credit is granted directly or is incidental to a transaction.  All extensions of credit are monitored and managed on a Jefferies enterprise level in order to limit exposure to loss related to credit risk.

Jefferies employs a Credit Risk Framework, which is responsible for identifying credit risks throughout its operating businesses, establishing counterparty limits and managing and monitoring those credit limits.   Jefferies framework includes:

defining credit limit guidelines and credit limit approval processes;

providing a consistent and integrated credit risk framework across the enterprise;

approving counterparties and counterparty limits with parameters set by its Risk Management Committee;

negotiating, approving and monitoring credit terms in legal and master documentation;

delivering credit limits to all relevant sales and trading desks;

maintaining credit reviews for all active and new counterparties;


59


operating a control function for exposure analytics and exception management and reporting;

determining the analytical standards and risk parameters for on-going management and monitoring of global credit risk books;

actively managing daily exposure, exceptions, and breaches;

monitoring daily margin call activity and counterparty performance (in concert with the Margin Department); and

setting the minimum global requirements for systems, reports, and technology.

Jefferies Credit Exposures

Credit exposure exists across a wide-range of products including cash and cash equivalents, loans, securities finance transactions and over-the-counter derivative contracts.

Loans and lending arise in connection with Jefferies capital markets activities and represents the current exposure, amount at risk on a default event with no recovery of loans. Current exposure represents loans that have been drawn by the borrower and lending commitments outstanding.  In addition, credit exposures on forward settling traded loans are included within Jefferies loans and lending exposures for consistency with the Statement of Financial Condition categorization of these items.

Securities and margin finance includes credit exposure arising on securities financing transactions (reverse repurchase agreements, repurchase agreements and securities lending agreements) to the extent the fair value of the underlying collateral differs from the contractual agreement amount and from margin provided to customers.

Derivatives represent over-the-counter ("OTC") derivatives, which are reported net by counterparty when a legal right of setoff exists under an enforceable master netting agreement.  Derivatives are accounted for at fair value net of cash collateral received or posted under credit support agreements.  In addition, credit exposures on forward settling trades are included within Jefferies derivative credit exposures.

Cash and cash equivalents include both interest-bearing and non-interest bearing deposits at banks.

Current counterparty credit exposures are summarized in the table below and provided by credit quality, region and industry. Credit exposures presented take netting and collateral into consideration by counterparty and master agreement.  Collateral taken into consideration includes both collateral received as cash as well as collateral received in the form of securities or other arrangements.  Current exposure is the loss that would be incurred on a particular set of positions in the event of default by the counterparty, assuming no recovery.  Current exposure equals the fair value of the positions less collateral.  Issuer risk is the credit risk arising from inventory positions (for example, corporate debt securities and secondary bank loans).  Issuer risk is included in Jefferies country risk exposure tables below. The amounts in the tables below are for amounts included in our Consolidated Statements of Financial Condition at December 31, 2016 and 2015 (in millions).

Counterparty Credit Exposure by Credit Rating

Loans and Lending

Securities and

Margin Finance

OTC Derivatives

Total

Cash and Cash

Equivalents

Total with Cash and

Cash Equivalents

At

At

At

At

At

At

December 31, 2016

December 31, 2015

December 31, 2016

December 31, 2015

December 31, 2016

December 31, 2015

December 31, 2016

December 31, 2015

December 31, 2016

December 31, 2015

December 31, 2016

December 31, 2015

(1)

(1)

(1)

AAA Range  

$

-


$

-


$

-


$

11.8


$

-


$

-


$

-


$

11.8


$

2,601.8


$

2,461.4


$

2,601.8


$

2,473.2


AA Range  

44.0


-


87.3


152.3


2.1


4.4


133.4


156.7


37.0


175.0


170.4



331.7


A Range  

4.2


1.0


539.2


556.4


214.7


96.0


758.1


653.4


814.1


846.3


1,572.2



1,499.7


BBB Range  

4.9


86.6


117.3


107.9


9.4


31.7


131.6


226.2


51.2


25.8


182.8



252.0


BB or Lower  

100.1


181.6


6.2


14.8


23.8


30.1


130.1


226.5


25.1


-


155.2



226.5


Unrated  

93.5


56.3


-


-


-


0.1


93.5


56.4


0.3


1.7


93.8



58.1


Total  

$

246.7


$

325.5


$

750.0


$

843.2


$

250.0


$

162.3


$

1,246.7


$

1,331.0


$

3,529.5


$

3,510.2


$

4,776.2


$

4,841.2



60


Counterparty Credit Exposure by Region

Loans and Lending

Securities and

Margin Finance

OTC Derivatives

Total

Cash and Cash

Equivalents

Total with Cash and

Cash Equivalents

At

At

At

At

At

At

December 31, 2016

December 31, 2015

December 31, 2016

December 31, 2015

December 31, 2016

December 31, 2015

December 31, 2016

December 31, 2015

December 31, 2016

December 31, 2015

December 31, 2016

December 31, 2015

(1)

(1)

(1)

Asia/Latin America/

Other  

$

4.9


$

10.1


$

16.3


$

15.3


$

32.7


$

40.6


$

53.9


$

66.0


$

165.8


$

159.6


$

219.7


$

225.6


Europe  

-


0.4


234.4


212.2


20.9


43.4


255.3


256.0


248.0


341.8


503.3


597.8


North America  

241.8


315.0


499.3


615.7


196.4


78.3


937.5


1,009.0


3,115.7


3,008.8


4,053.2


4,017.8


Total  

$

246.7


$

325.5


$

750.0


$

843.2


$

250.0


$

162.3


$

1,246.7


$

1,331.0


$

3,529.5


$

3,510.2


$

4,776.2


$

4,841.2


Counterparty Credit Exposure by Industry

Loans and Lending

Securities and

Margin Finance

OTC Derivatives

Total

Cash and Cash

Equivalents

Total with Cash and

Cash Equivalents

At

At

At

At

At

At

December 31, 2016

December 31, 2015

December 31, 2016

December 31, 2015

December 31, 2016

December 31, 2015

December 31, 2016

December 31, 2015

December 31, 2016

December 31, 2015

December 31, 2016

December 31, 2015

(1)

(1)

(1)

Asset Managers  

$

-


$

-


$

39.7


$

69.8


$

10.9


$

-


$

50.6


$

69.8


$

2,599.5


$

2,461.3


$

2,650.1


$

2,531.1


Banks, Broker-dealers

0.2


0.9


435.9


464.9


170.4


95.2


606.5


561.0


930.0


1,048.9


1,536.5


1,609.9


Commodities  

-


-


-


-


3.3


16.7


3.3


16.7


-


-


3.3


16.7


Corporates/Loans

204.4


193.9


-


-


18.4


11.3


222.8


205.2


-


-


222.8


205.2


Other  

42.1


130.7


274.4


308.5


47.0


39.1


363.5


478.3


-


-


363.5


478.3


Total  

$

246.7


$

325.5


$

750.0


$

843.2


$

250.0


$

162.3


$

1,246.7


$

1,331.0


$

3,529.5


$

3,510.2


$

4,776.2


$

4,841.2


(1) Loans and lending amounts have been recast to conform to the current period's presentation. Loans and lending amounts include the current exposure, the amount at risk on a default event with no recovery of loans. Previously, loans and lending amounts represented the notional value.

For additional information regarding credit exposure to OTC derivative contracts, see Note 5 in the consolidated financial statements.


61


Jefferies Country Risk Exposure

Country risk is the risk that events or developments that occur in the general environment of a country or countries due to economic, political, social, regulatory, legal or other factors, will affect the ability of obligors of the country to honor their obligations.  Jefferies defines country risk as the country of jurisdiction or domicile of the obligor.  The following tables reflect Jefferies top exposures to the sovereign governments, corporations and financial institutions in those non-U.S. countries in which there is net long issuer and counterparty exposure, as reflected in our Consolidated Statements of Financial Condition at December 31, 2016 and 2015 (in millions):

December 31, 2016

Issuer Risk

Counterparty Risk

Issuer and Counterparty Risk

Fair Value of

Long Debt

 Securities

Fair Value of

Short Debt

 Securities

Net Derivative

Notional

 Exposure

Loans

and

 Lending

Securities

and Margin

 Finance

OTC

 Derivatives

Cash and

Cash Equivalents

Excluding

Cash and Cash Equivalents

Including

Cash and

Cash

Equivalents

Germany

$

318.9


$

(166.4

)

$

815.3


$

-


$

86.9


$

0.3


$

111.9


$

1,055.0


$

1,166.9


Italy

1,069.8


(844.2

)

69.8


-


-


0.2


-


295.6


295.6


France

356.2


(538.4

)

419.5


-


24.8


3.4


-


265.5


265.5


United Kingdom

290.1


(136.4

)

(12.7

)

-


61.0


13.4


37.7


215.4


253.1


Spain

210.4


(151.7

)

-


-


-


0.3


50.2


59.0


109.2


Hong Kong

34.0


(30.2

)

1.3


-


0.5


-


79.1


5.6


84.7


Switzerland

80.7


(33.6

)

12.1


-


11.4


2.2


4.1


72.8


76.9


Ireland

124.4


(61.2

)

4.4


-


0.6


-


-


68.2


68.2


Singapore

36.2


(9.6

)

3.9


-


-


-


16.1


30.5


46.6


Qatar

15.2


(0.7

)

-


-


-


27.1


-


41.6


41.6


Total

$

2,535.9


$

(1,972.4

)

$

1,313.6


$

-


$

185.2


$

46.9


$

299.1


$

2,109.2


$

2,408.3


December 31, 2015

Issuer Risk

Counterparty Risk

Issuer and Counterparty Risk

Fair Value of

Long Debt

 Securities

Fair Value of

Short Debt

 Securities

Net Derivative

Notional

 Exposure

Loans

and

 Lending

Securities

and Margin

 Finance

OTC

 Derivatives

Cash and

Cash Equivalents

Excluding

Cash and Cash Equivalents

Including

Cash and

Cash Equivalents

Belgium

$

413.8


$

(48.8

)

$

6.2


$

-


$

-


$

-


$

157.8


$

371.2


$

529.0


United Kingdom

711.6


(359.3

)

52.4


0.4


31.6


25.4


26.3


462.1


488.4


Netherlands

543.5


(139.6

)

(23.4

)

-


36.2


2.0


-


418.7


418.7


Italy

1,112.2


(662.4

)

(105.6

)

-


-


0.2


-


344.4


344.4


Ireland

164.3


(27.4

)

3.3


-


3.5


-


-


143.7


143.7


Spain

394.0


(291.9

)

(1.6

)

-


-


0.2


26.6


100.7


127.3


Australia

86.6


(24.9

)

9.6


37.4


-


0.3


0.8


109.0


109.8


Hong Kong

38.1


(22.3

)

(2.9

)

-


0.4


-


74.8


13.3


88.1


Switzerland

79.5


(28.9

)

(6.6

)

-


34.5


5.2


3.7


83.7


87.4


Portugal

111.9


(38.2

)

-


-


-


-


-


73.7


73.7


Total

$

3,655.5


$

(1,643.7

)

$

(68.6

)

$

37.8


$

106.2


$

33.3


$

290.0


$

2,120.5


$

2,410.5


In addition, Jefferies' issuer and counterparty risk exposure to Puerto Rico was $31.0 million, as reflected in our Consolidated Statement of Financial Condition at December 31, 2016 , which is in connection with its municipal securities market making activities. The government of Puerto Rico is seeking to restructure much of its $70.0 billion in debt on a voluntary basis. At December 31, 2016 , Jefferies had no material exposure to countries where either sovereign or non-sovereign sectors potentially pose potential default risk as the result of liquidity concerns.

Other than our trading portfolio, our financial instrument portfolio is primarily classified as available for sale, and consequently, is recorded at fair value with unrealized gains and losses reflected in equity.  Included in our available for sale portfolio are fixed income securities, which comprised approximately 74% of the total available for sale portfolio at December 31, 2016 .  These fixed


62


income securities are primarily rated "investment grade" or are U.S. governmental agency issued or U.S. Government-Sponsored Enterprises.  The estimated weighted average remaining life of these fixed income securities was approximately 0.9 years at December 31, 2016 .  Our fixed income securities, like all fixed income instruments, are subject to interest rate risk and will fall in value if market interest rates increase.  At December 31, 2015 , fixed income securities comprised approximately 64% of the total portfolio and had an estimated weighted average remaining life of approximately 2.1 years.

Also included in the available for sale portfolio are equity securities, which are recorded at an aggregate fair value of $79.4 million (aggregate cost of $53.0 million) and which comprised approximately 26% of our total available for sale portfolio at December 31, 2016 .  We evaluate our portfolio for impairment on a quarterly basis.

The following table provides information about our financial instruments used for purposes other than trading that are primarily sensitive to changes in interest rates.

For additional information see Note 8 to our consolidated financial statements.

Expected Maturity Date

2017

2018

2019

2020

2021

Thereafter

Total

Fair Value

(Dollars in thousands)

Rate Sensitive Assets:

Available for Sale Fixed

  Income Securities:

U.S. Government

$

174,933


$

-


$

-


$

-


$

-


$

-


$

174,933


$

174,933


    Weighted-Average

      Interest Rate

0.21

%








Residential mortgage-backed:

      Rated Investment Grade

$

3,122


$

1,714


$

3,240


$

933


$

708


$

1,901


$

11,618


$

11,618


     Weighted-Average

        Interest Rate

2.70

%

2.74

%

3.55

%

2.58

%

2.56

%

2.75

%



     Rated Less Than Investment

       Grade/Not Rated

$

2,833


$

1,415


$

2,130


$

221


$

170


$

746


$

7,515


$

7,515


    Weighted-Average

        Interest Rate

2.12

%

2.88

%

3.81

%

3.99

%

3.94

%

3.97

%



Commercial mortgage-backed:









Rated Investment Grade

$

-


$

3,464


$

995


$

3,878


$

-


$

-


$

8,337


$

8,337


     Weighted-Average

       Interest Rate


2.80

%

3.80

%

4.10

%



Other asset-backed:








Rated Investment Grade

$

6,403


$

12,639


$

-


$

-


$

-


$

-


$

19,042


$

19,042


     Weighted-Average

       Interest Rate

2.80

%

3.08

%





All other corporates:









     Rated Less Than Investment

       Grade/Not Rated

$

-


$

-


$

179


$

-


$

-


$

-


$

179


$

179


     Weighted-Average

        Interest Rate

6.75

%





63


We are also subject to interest rate risk on our long-term fixed interest rate debt.  Generally, the fair market value of debt securities with a fixed interest rate will increase as interest rates fall, and the fair market value will decrease as interest rates rise.  The following table represents principal cash flows by expected maturity dates for our consolidated long-term debt obligations.  For the variable rate borrowings, the weighted average interest rates are based on implied forward rates in the yield curve at the reporting date.  Our market risk with respect to foreign currency exposure on our long-term debt is also shown below.  For additional information, see Note 16 to our consolidated financial statements.

Expected Maturity Date

2017

2018

2019

2020

2021

Thereafter

Total

Fair Value

(Dollars in thousands)

Rate Sensitive Liabilities:

Fixed Interest Rate Borrowings

$

345,000


$

863,910


$

945,253


$

104,500


$

750,000


$

3,071,358


$

6,080,021


$

6,366,749


    Weighted-Average Interest Rate

3.88

%

5.19

%

7.62

%

5.49

%

6.88

%

5.77

%



Variable Interest Rate Borrowings

$

100,454


$

316,558


$

2,511


$

34,555


$

2,655


$

45,648


$

502,381


$

502,090


    Weighted-Average Interest Rate

3.54

%

4.08

%

3.98

%

3.26

%

3.97

%

4.01

%



Borrowings with Foreign Currency Exposure

$

-


$

6,360


$

10,600


$

529,975


$

-


$

41,339


$

588,274


$

601,475


    Weighted-Average Interest Rate


0.74

%

2.15

%

2.38

%

3.82

%



Item 8 .

Financial Statements and Supplementary Data .

Financial Statements and supplementary data required by this Item 8 are set forth at the pages indicated in Item 15(a) below.

Item 9 .

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .

None.

Item 9A .

Controls and Procedures .

Evaluation of disclosure controls and procedures

The Company's management evaluated, with the participation of the Company's principal executive and principal financial officers, the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of December 31, 2016 .  Based on their evaluation, the Company's principal executive and principal financial officers concluded that the Company's disclosure controls and procedures were effective as of December 31, 2016 .

Changes in internal control over financial reporting

There has been no change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company's fiscal quarter ended December 31, 2016 , that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.


64


Management's Report on Internal Control Over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934.  Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the Company;

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2016 .  In making this assessment, the Company's management used the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013.

Based on our assessment and those criteria, management concluded that, as of December 31, 2016 , the Company's internal control over financial reporting was effective.

The effectiveness of the Company's internal control over financial reporting as of December 31, 2016 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein in Item 8.

Item 9B .

Other Information .

On February 23, 2017, our Board of Directors approved an amendment to our By-Laws to adopt shareholder proxy access. Under our Amended and Restated By-Laws, shareholders (or a group of up to 20 shareholders) holding 3% of our outstanding shares for three years may submit Board nominees for inclusion in our annual proxy statement. Subject to our By-Laws, shareholders may include two nominees (or up to 20% of the size of our Board, if greater).



65


PART III

Item 10 .

Directors, Executive Officers of the Registrant and Corporate Governance .

Information with respect to this item will be contained in the Proxy Statement for the 2017 Annual Meeting of Shareholders, which is incorporated herein by reference.

We have a Code of Business Practices, which is applicable to all directors, officers and employees, and is available on our website. We intend to post amendments to or waivers from our Code of Business Practices on our website as required by applicable law.

Item 11 .

Executive Compensation .

Information with respect to this item will be contained in the Proxy Statement for the 2017 Annual Meeting of Shareholders, which is incorporated herein by reference.

Item 12 .

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters .

Information with respect to this item will be contained in the Proxy Statement for the 2017 Annual Meeting of Shareholders, which is incorporated herein by reference.

Item 13 .

Certain Relationships and Related Transactions, and Director Independence .

Information with respect to this item will be contained in the Proxy Statement for the 2017 Annual Meeting of Shareholders, which is incorporated herein by reference.

Item 14 .

Principal Accountant Fees and Services .

Information with respect to this item will be contained in the Proxy Statement for the 2017 Annual Meeting of Shareholders, which is incorporated herein by reference.


66


PART IV

Item 15.

Exhibits and Financial Statement Schedules.

(a)(1)

Financial Statements.

Report of Independent Registered Public Accounting Firm

F-1

Financial Statements:

Consolidated Statements of Financial Condition at December 31, 2016 and 2015

F-2

Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014

F-3

Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2016, 2015 and 2014

F-5

Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014

F-6

Consolidated Statements of  Changes in Equity for the years ended December 31, 2016, 2015 and 2014

F-8

Notes to Consolidated Financial Statements

F-9

(2)

Financial Statement Schedules.

Schedule I - Condensed Financial Information of Leucadia National Corporation (Parent Company Only) at December 31, 2016 and 2015 and for the years ended December 31, 2016, 2015 and 2014.

(3)

See Exhibit Index below for a complete list of Exhibits to this report.

(b)

Exhibits.

We will furnish any exhibit upon request made to our Corporate Secretary, 520 Madison Avenue, New York, NY 10022.  We charge $.50 per page to cover expenses of copying and mailing.

All documents referenced below were filed pursuant to the Securities Exchange Act of 1934 by the Company, file number 1-5721, unless otherwise indicated.

Item 16 .

Form 10-K Summary .

None.

Exhibit Index

3.1

Restated Certificate of Incorporation (filed as Exhibit 5.1 to the Company's Current Report on Form 8-K dated July 14, 1993).*

3.2

Certificate of Amendment of the Certificate of Incorporation dated as of May 14, 2002 (filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (the "2003 10-K")).*

3.3

Certificate of Amendment of the Certificate of Incorporation dated as of December 23, 2002 (filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002).*

3.4

Certificate of Amendment of the Certificate of Incorporation dated as of May 13, 2004 (filed as Exhibit 3.5 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004).*

3.5

Certificate of Amendment of the Certificate of Incorporation dated as of May 17, 2005 (filed as Exhibit 3.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (the "2005 10-K")).*

3.6

Certificate of Amendment of the Certificate of Incorporation dated as of May 23, 2007 (filed as Exhibit 4.7 to the Company's Registration Statement on Form S-8 (No. 333-143770)).*

3.7

Certificate of Amendment to the Certificate of Incorporation dated as of February 26, 2013 (filed as Exhibit 3.7 to the Company's Current Report on Form 8-K on March 1, 2013 (the "March 1, 2013 Form 8-K")).*

3.8

Certificate of Amendment to the Certificate of Incorporation dated as of February 28, 2013 (filed as Exhibit 3.8 to the March 1, 2013 Form 8-K).*


67


3.9

Amended and Restated By-laws of Leucadia National Corporation (effective February 23, 2017).

4.1

The Company undertakes to furnish the Securities and Exchange Commission, upon written request, a copy of all instruments with respect to long-term debt not filed herewith.

10.31

1999 Stock Option Plan as Amended and Restated (filed as Exhibit 99.1 to the Company's Registration Statement on Form S-8 (No. 333-169377)).* +

10.32

Form of Grant Letter for the 1999 Stock Option Plan (filed as Exhibit 10.3 to the Company's Current Report on Form 8-K filed on February 24, 2012 (the "February 24, 2012 8-K")).* +

10.33

Leucadia National Corporation 2003 Incentive Compensation Plan (filed as Appendix II to the Company's Proxy Statement dated June 27, 2013 (the "2013 Proxy Statement")).* +

10.34

Form of Restricted Stock Units Agreement (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated July 31, 2013).* +

10.35

Form of Restricted Stock Agreement (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K dated July 31, 2013).* +

10.36

Leucadia National Corporation 1999 Directors' Stock Compensation Plan (filed as Appendix II to the 2013 Proxy Statement).* +

10.37

Amended and Restated Shareholders Agreement dated as of June 30, 2003 among the Company, Ian M. Cumming and Joseph S. Steinberg (filed as Exhibit 10.5 to the 2003 10-K).* +

10.38

Amendment No. 1, dated as of May 16, 2006, to the Amended and Restated Shareholders Agreement dated as of June 30, 2003, by and among Ian M. Cumming, Joseph S. Steinberg and the Company (filed as Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006).* +

10.39

Services Agreement, dated as of January 1, 2004, between the Company and Joseph S. Steinberg (filed as Exhibit 10.38 to the 2005 10-K).* +

10.40

Compensation Information Concerning Non-Employee Directors (incorporated by reference to page 16 of the Company's Proxy Statement dated April 14, 2016).* +

10.41

First Amended and Restated Limited Liability Company Agreement of National Beef Packing Company, dated as of December 30, 2011 (filed as Exhibit 10.1 to the December 30, 2011 8-K).*

10.42

Cattle Purchase and Sale Agreement by and between National Beef Packing Company, LLC and U.S. Premium Beef, LLC, dated as of December 30, 2011 (filed as Exhibit 10.6 to the December 30, 2011 8-K).*

10.43

Summary of executive bonus compensation (filed in the Company's Current Report on Form 8-K dated January 24, 2017).* +

10.44

Summary of executive compensation for Richard B. Handler and Brian P. Friedman (filed in the Company's Current Report on Form 8-K dated December 22, 2016).* +

10.45

Summary of executive compensation for Richard B. Handler, Brian P. Friedman and Michael J. Sharp (filed in the Company's Current Report on Form 8-K dated February 28, 2014, as updated for Richard B. Handler and Brian P. Friedman by the Company's Current Report on Form 8-K dated February 19, 2016).* +

10.46

Agreement of Terms dated as of December 31, 2011 between Leucadia National Corporation and Berkshire Hathaway Inc. (filed as Exhibit 10.1 to the February 24, 2012 8-K).*

10.47

Acknowledgement to Registration Rights Agreement, dated as of March 18, 2014, by and among Harbinger Group Inc., Harbinger Capital Partners Master Fund, Ltd., Global Opportunities Breakaway Ltd., Harbinger Capital Partners Special Situations Fund, L.P. and Leucadia National Corporation (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K/A dated March 18, 2014).*

10.48

Letter Agreement, dated as of March 18, 2014, by and between Harbinger Group Inc. and Leucadia National Corporation (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K/A dated March 18, 2014).*

10.49

Exchange Agreement by and among Harbinger Capital Group Partners Master Fund I, Ltd., Global Opportunities Breakaway Ltd., Harbinger Capital Partners Special Situations Fund, L.P., and Leucadia National Corporation (filed as Exhibit 99.5 to Schedule 13D filed March 28, 2014).*

10.50

Joinder Agreement to Registration Rights Agreement by and among Harbinger Capital Group Partners Master Fund I, Ltd., Global Opportunities Breakaway Ltd., Harbinger Capital Partners Special Situations Fund, L.P., and Leucadia National Corporation (filed as Exhibit 99.8 to Schedule 13D filed on March 28, 2014).*


68


10.51

Stockholders Agreement, dated as of March 28, 2014, by and between HomeFed Corporation and Leucadia National Corporation (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated April 3, 2014).*

21

Subsidiaries of the registrant.

23.1

Consent of PricewaterhouseCoopers LLP, with respect to the incorporation by reference into the Company's Registration Statements on Form S-8 (No. 333-169377), Form S-8 (No. 333-51494), Form S-8 (No. 333-143770), Form S-8 (No. 333-185318) and Form S-3 (No. 333-214759).

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

32.2

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

101

Financial statements from the Annual Report on Form 10-K of Leucadia National Corporation for the year ended December 31, 2016, formatted in Extensible Business Reporting Language (XBRL):  (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Changes in Equity, (vi) the Notes to Consolidated Financial Statements and (vii) the Financial Statement Schedule.

____________________________

+

Management/Employment Contract or Compensatory Plan or Arrangement.

*

Incorporated by reference.

**

Furnished herewith pursuant to item 601(b) (32) of Regulation S-K.



69


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 

LEUCADIA NATIONAL CORPORATION

Date:  February 27, 2017

By:

/s/        John M. Dalton

Name: John M. Dalton

Title:   Vice President and Controller

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on the date set forth below.

Date

Signature

Title

February 27, 2017

By:

/s/ Joseph S. Steinberg

Chairman of the Board

Joseph S. Steinberg

February 27, 2017

By:

/s/ Richard B. Handler

Chief Executive Officer and Director

Richard B. Handler

(Principal Executive Officer)

February 27, 2017

By:

/s/ Brian P. Friedman

President and Director

Brian P. Friedman

February 27, 2017

By:

/s/ Teresa S. Gendron

Vice President and Chief Financial Officer

Teresa S. Gendron

(Principal Financial Officer)

February 27, 2017

By:

/s/ John M. Dalton

Vice President and Controller

John M. Dalton

(Principal Accounting Officer)

February 27, 2017

By:

/s/ Linda L. Adamany

Director

Linda L. Adamany

February 27, 2017

By:

/s/ Robert D. Beyer

Director

Robert D. Beyer

February 27, 2017

By:

/s/ Francisco L. Borges

Director

Francisco L. Borges

February 27, 2017

By:

/s/ W. Patrick Campbell

Director

W. Patrick Campbell

February 27, 2017

By:

/s/ Robert E. Joyal

Director

Robert E. Joyal

February 27, 2017

By:

/s/ Jeffrey C. Keil

Director

Jeffrey C. Keil

February 27, 2017

By:

/s/ Michael T. O'Kane

Director

Michael T. O'Kane

February 27, 2017

By:

/s/ Stuart H. Reese

Director

Stuart H. Reese



70



Report of Independent Registered Public Accounting Firm

To the Board of Directors and

Shareholders of Leucadia National Corporation:

In our opinion, the accompanying consolidated statement of financial condition and the related consolidated statements of operations, of comprehensive income, of changes in equity, and of cash flows present fairly, in all material respects, the financial position of Leucadia National Corporation and its subsidiaries (the "Company") at December 31, 2016 and December 31, 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in "Management's Report on Internal Control over Financial Reporting". Our responsibility is to express opinions on these financial statements, on the financial statement schedules and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.


A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

New York, New York

February 27, 2017



F- 1


LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Financial Condition

December 31, 2016 and 2015

(Dollars in thousands, except par value)

2016

2015

ASSETS

Cash and cash equivalents

$

3,807,558


$

3,638,648


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

857,337


751,084


Financial instruments owned, including securities pledged of $9,706,881 and $12,207,123:



Trading assets, at fair value

14,985,237


18,293,090


Available for sale securities

301,049


207,355


Total financial instruments owned

15,286,286


18,500,445


Investments in managed funds

515,318


603,720


Loans to and investments in associated companies

2,125,098


1,757,369


Securities borrowed

7,743,562


6,975,136


Securities purchased under agreements to resell

3,862,488


3,854,746


Receivables

4,425,178


3,830,967


Property, equipment and leasehold improvements, net

709,242


721,875


Intangible assets, net and goodwill

2,513,678


2,648,362


Deferred tax asset, net

1,461,815


1,575,368


Assets held for sale

128,083


-


Other assets

1,635,664


1,473,464


Total assets

$

45,071,307


$

46,331,184


LIABILITIES



Short-term borrowings

$

525,842


$

310,659


Trading liabilities, at fair value

8,388,619


6,840,430


Securities loaned

2,819,132


3,014,300


Securities sold under agreements to repurchase

6,791,676


9,966,868


Other secured financings

1,026,429


908,741


Payables, expense accruals and other liabilities

7,373,708


7,107,081


Long-term debt

7,380,443


7,400,582


Total liabilities

34,305,849


35,548,661


Commitments and contingencies



MEZZANINE EQUITY



Redeemable noncontrolling interests

336,809


191,633


Mandatorily redeemable convertible preferred shares

125,000


125,000


EQUITY



Common shares, par value $1 per share, authorized 600,000,000 shares; 359,425,061 and 362,617,423 shares issued and outstanding, after deducting 56,947,654 and 53,755,292 shares held in treasury

359,425


362,617


Additional paid-in capital

4,812,587


4,986,819


Accumulated other comprehensive income

310,697


438,793


Retained earnings

4,645,391


4,612,982


Total Leucadia National Corporation shareholders' equity

10,128,100


10,401,211


Noncontrolling interests

175,549


64,679


Total equity

10,303,649


10,465,890


Total

$

45,071,307


$

46,331,184



The accompanying notes are an integral part of these consolidated financial statements.

F- 2


LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

For the years ended December 31, 2016 , 2015 and 2014

(In thousands, except per share amounts)

2016

2015

2014

Revenues:

Beef processing services

$

7,021,902


$

7,396,869


$

7,824,246


Commissions

611,574


659,002


668,801


Principal transactions

603,822


642,824


662,213


Investment banking

1,193,973


1,417,807


1,526,637


Interest income

926,255


955,240


1,052,151


Net realized securities gains

29,542


62,957


30,394


Other

488,186


549,228


570,465


Total revenues

10,875,254


11,683,927


12,334,907


Interest expense

812,637


797,469


848,422


Net revenues

10,062,617


10,886,458


11,486,485


Expenses:




Cost of sales

6,850,807


7,677,233


8,024,286


Compensation and benefits

1,730,585


1,665,465


1,841,674


Floor brokerage and clearing fees

167,205


199,780


215,329


Interest

108,703


115,804


120,935


Depreciation and amortization

211,593


224,133


185,993


Provision for doubtful accounts

24,580


7,353


59,695


Selling, general and other expenses

807,312


750,435


795,878


9,900,785


10,640,203


11,243,790


Income from continuing operations before income taxes and income related to associated companies

161,832


246,255


242,695


Income related to associated companies

154,598


110,281


138,527


Income from continuing operations before income taxes

316,430


356,536


381,222


Income tax provision

122,109


109,947


165,971


Income from continuing operations

194,321


246,589


215,251


Income (loss) from discontinued operations, net of income tax provision (benefit) of $0, $231 and $(9,634)

-


429


(17,893

)

Gain on disposal of discontinued operations, net of income tax provision of $0, $2,743 and $899

-


5,093


1,667


Net income

194,321


252,111


199,025


Net loss attributable to the noncontrolling interests

1,426


4,996


727


Net (income) loss attributable to the redeemable noncontrolling interests

(65,746

)

26,543


8,616


Preferred stock dividends

(4,063

)

(4,063

)

(4,062

)

Net income attributable to Leucadia National Corporation common shareholders

$

125,938


$

279,587


$

204,306


(continued)



The accompanying notes are an integral part of these consolidated financial statements.

F- 3


LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations, continued

For the years ended December 31, 2016 , 2015 and 2014

(In thousands, except per share amounts)

2016

2015

2014

Basic earnings (loss) per common share attributable to Leucadia National Corporation common shareholders:

Income from continuing operations

$

0.34


$

0.73


$

0.58


Income (loss) from discontinued operations

-


-


(0.05

)

Gain on disposal of discontinued operations

-


0.01


0.01


Net income

$

0.34


$

0.74


$

0.54


Diluted earnings (loss) per common share attributable to Leucadia National Corporation common shareholders:




Income from continuing operations

$

0.34


$

0.73


$

0.58


Income (loss) from discontinued operations

-


-


(0.05

)

Gain on disposal of discontinued operations

-


0.01


0.01


Net income

$

0.34


$

0.74


$

0.54


Amounts attributable to Leucadia National Corporation common shareholders:




Income from continuing operations, net of taxes

$

125,938


$

274,065


$

220,584


Income (loss) from discontinued operations, net of taxes

-


429


(17,945

)

Gain on disposal of discontinued operations, net of taxes

-


5,093


1,667


Net income

$

125,938


$

279,587


$

204,306




The accompanying notes are an integral part of these consolidated financial statements.

F- 4


LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

For the years ended December 31, 2016 , 2015 and 2014

(In thousands)

2016

2015

2014

Net income

$

194,321


$

252,111


$

199,025


Other comprehensive income (loss):




Net unrealized holding gains (losses) on investments arising during the period, net of income tax provision (benefit) of $2,262, $(5,029) and $(4,923)

3,900


(9,057

)

(8,866

)

Less: reclassification adjustment for net (gains) losses included in net income (loss), net of income tax provision (benefit) of $2, $6,068 and $1,631

(4

)

(10,930

)

(2,939

)

Net change in unrealized holding gains (losses) on investments, net of income tax provision (benefit) of $2,260, $(11,097) and $(6,554)

3,896


(19,987

)

(11,805

)

Net unrealized foreign exchange gains (losses) arising during the period, net of income tax provision (benefit) of $(3,530), $(5,174) and $(6,837)

(121,581

)

(36,477

)

(43,307

)

Less: reclassification adjustment for foreign exchange (gains) losses included in net income (loss), net of income tax provision (benefit) of $0, $0 and $149

-


-


(267

)

Net change in unrealized foreign exchange gains (losses), net of income tax provision (benefit) of $(3,530), $(5,174) and $(6,986)

(121,581

)

(36,477

)

(43,574

)

Net unrealized gains (losses) on instrument specific credit risk arising during the period, net of income tax provision (benefit) of $(4,251), $0 and $0

(6,494

)

-


-


Less: reclassification adjustment for instrument specific credit risk (gains) losses included in net income (loss), net of income tax provision (benefit) of $0, $0 and $0

-


-


-


Net change in unrealized instrument specific credit risk gains (losses), net of income tax provision (benefit) of $(4,251), $0 and $0

(6,494

)

-


-


Net unrealized gains (losses) on derivatives arising during the period, net of income tax provision (benefit) of $0, $0 and $0

-


-


-


Less: reclassification adjustment for derivative (gains) losses included in net income (loss), net of income tax provision (benefit) of $0, $0 and $(95)

-


-


169


Net change in unrealized derivative gains (losses), net of income tax provision (benefit) of $0, $0 and $95

-


-


169


Net pension gains (losses) arising during the period, net of income tax provision (benefit) of $(2,516), $7,152 and $(17,698)

(5,451

)

17,073


(38,959

)

Less: reclassification adjustment for pension (gains) losses included in net income (loss), net of income tax provision (benefit) of $(700), $(17,159) and $(1,676)

1,534


31,102


3,201


Net change in pension liability benefits, net of income tax provision (benefit) of $(1,816), $24,311 and $(16,022)

(3,917

)

48,175


(35,758

)

Other comprehensive loss, net of income taxes

(128,096

)

(8,289

)

(90,968

)

Comprehensive income

66,225


243,822


108,057


Comprehensive loss attributable to the noncontrolling interests

1,426


4,996


727


Comprehensive (income) loss attributable to the redeemable noncontrolling interests

(65,746

)

26,543


8,616


Preferred stock dividends

(4,063

)

(4,063

)

(4,062

)

Comprehensive income (loss) attributable to Leucadia National Corporation common shareholders

$

(2,158

)

$

271,298


$

113,338



The accompanying notes are an integral part of these consolidated financial statements.

F- 5


LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the years ended December 31, 2016 , 2015 and 2014

(In thousands)

2016

2015

2014

Net cash flows from operating activities:

Net income

$

194,321


$

252,111


$

199,025


Adjustments to reconcile net income to net cash provided by (used for) operations:




Deferred income tax provision

118,631


134,016


126,885


Depreciation and amortization of property, equipment and leasehold improvements

144,116


164,067


124,977


Other amortization

22,673


8,006


14,767


Share-based compensation

33,597


74,087


109,838


Provision for doubtful accounts

34,252


20,168


69,907


Net securities gains

(29,542

)

(62,957

)

(30,394

)

Income related to associated companies

(171,782

)

(185,998

)

(228,769

)

Distributions from associated companies

191,455


223,658


176,491


Net (gains) losses related to property and equipment, and other assets

83,053


29,776


(27,784

)

Gain on disposal of discontinued operations

-


(7,836

)

(12,566

)

Change in estimated litigation reserve

-


(96,500

)

101,710


Net change in:




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

(107,771

)

2,691,028


166,108


Trading assets

2,687,399


1,380,230


(3,223,327

)

Investments in managed funds

75,144


(295,342

)

(80,247

)

Securities borrowed

(805,779

)

(127,060

)

(1,497,438

)

Securities purchased under agreements to resell

(112,777

)

56,377


(200,568

)

Receivables from brokers, dealers and clearing organizations

(488,623

)

551,021


11,872


Receivables from customers of securities operations

340,690


58,233


(349,767

)

Other receivables

(162,748

)

(145,634

)

(161,415

)

Other assets

(283,234

)

83,414


(107,028

)

Trading liabilities

1,727,698


(2,011,277

)

1,832,930


Securities loaned

(122,946

)

420,929


95,607


Securities sold under agreements to repurchase

(3,144,433

)

(688,355

)

(84,303

)

Payables to brokers, dealers and clearing organizations

569,246


486,841


968,615


Payables to customers of securities operations

(483,188

)

(3,455,080

)

1,089,423


Trade payables, expense accruals and other liabilities

361,295


(225,711

)

(3,546

)

Other

(61,900

)

(93,967

)

(68,163

)

Net cash provided by (used for) operating activities

608,847


(761,755

)

(987,160

)

Net cash flows from investing activities:




Acquisitions of property, equipment and leasehold improvements, and other assets

(318,678

)

(295,894

)

(600,837

)

Proceeds from disposals of property and equipment, and other assets

62,463


22,820


52,011


Proceeds from disposal of discontinued operations, net of expenses and cash of operations sold

-


5,842


223,217


Acquisitions, net of cash acquired

(9,673

)

-


(61,493

)

Cash paid and cash of real estate operations sold to HomeFed Corporation

-


-


(19,730

)

Advances on notes, loans and other receivables

(342,281

)

(420,219

)

(8,500

)

Collections on notes, loans and other receivables

121,825


153,004


22,002


Loans to and investments in associated companies

(763,528

)

(1,492,060

)

(2,959,689

)

Capital distributions and loan repayment from associated companies

703,108


1,389,262


2,756,320


Deconsolidation of asset management entities

(326

)

(16,512

)

(207,965

)

Purchases of investments (other than short-term)

(739,298

)

(873,831

)

(1,821,635

)

Proceeds from maturities of investments

162,393


379,629


1,191,349


Proceeds from sales of investments

483,360


1,931,656


1,878,427


Other

978


(2,532

)

5,606


Net cash provided by (used for) investing activities

(639,657

)

781,165


449,083


(continued)


The accompanying notes are an integral part of these consolidated financial statements.

F- 6


LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows, continued

For the years ended December 31, 2016 , 2015 and 2014

(In thousands)

2016

2015

2014

Net cash flows from financing activities:

Issuance of debt, net of issuance costs

$

1,020,050


$

363,595


$

1,002,636


Net change in short-term borrowings

204,882


298,659


-


Repayment of debt

(962,515

)

(1,316,494

)

(434,278

)

Net change in other secured financings

116,702


205,231


470,415


Net change in bank overdrafts

(46,536

)

-


-


Issuance of common shares

1,062


1,223


2,190


Net contributions from (distributions to) redeemable noncontrolling interests

(52,889

)

5,165


(2,765

)

Distributions to noncontrolling interests

(18,544

)

(7,277

)

(7,797

)

Contributions from noncontrolling interests

154,522


15,469


54,259


Purchase of common shares for treasury

(95,020

)

(125,754

)

(75,728

)

Dividends paid

(91,296

)

(92,550

)

(93,071

)

Other

488


750


1,921


Net cash provided by (used for) financing activities

230,906


(651,983

)

917,782


Effect of foreign exchange rate changes on cash

(25,980

)

(5,554

)

(10,525

)

Cash classified as assets held for sale

(5,206

)

-


-


Net increase (decrease) in cash and cash equivalents

168,910


(638,127

)

369,180





Cash and cash equivalents at January 1,

3,638,648


4,276,775


3,907,595





Cash and cash equivalents at December 31,

$

3,807,558


$

3,638,648


$

4,276,775


Supplemental disclosures of cash flow information:




Cash paid during the year for:




Interest

$

957,140


$

980,266


$

1,038,201


Income tax payments, net

$

(13,738

)

$

510


$

9,880


Non-cash investing activities:




Transfer of investment in FXCM from trading assets to Loans to and investments in associated companies

$

334,500


$

-


$

-


Non-cash financing activities:




Issuance of common shares for debt conversion

$

-


$

-


$

97,546





The accompanying notes are an integral part of these consolidated financial statements.

F- 7


LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Equity

For the years ended December 31, 2016 , 2015 and 2014

(In thousands, except par value and per share amounts)

Leucadia National Corporation Common Shareholders

Common

Shares

$1 Par

Value

Additional

Paid-In

Capital

Accumulated

Other

Comprehensive

Income (Loss)

Retained

Earnings

Subtotal

Non-controlling

Interests

Total

Balance, January 1, 2014

$

364,541


$

4,881,031


$

538,050


$

4,318,840


$

10,102,462


$

70,591


$

10,173,053


Net income




204,306


204,306


(727

)

203,579


Other comprehensive loss, net of taxes



(90,968

)


(90,968

)


(90,968

)

Contributions from noncontrolling interests





-


72,221


72,221


Distributions to noncontrolling interests





-


(8,977

)

(8,977

)

Deconsolidation of asset management entities





-


(77,475

)

(77,475

)

Change in interest in consolidated subsidiary


(3,654

)



(3,654

)

3,654


-


Share-based compensation expense


109,838




109,838



109,838


Change in fair value of redeemable noncontrolling interests


45,401




45,401



45,401


Issuance of common shares for debt conversion

4,606


92,940




97,546



97,546


Purchase of common shares for treasury

(2,990

)

(72,738

)



(75,728

)


(75,728

)

Dividends ($.25 per common share)




(95,077

)

(95,077

)


(95,077

)

Other

1,342


6,690




8,032


8,577


16,609


Balance, December 31, 2014

367,499


5,059,508


447,082


4,428,069


10,302,158


67,864


10,370,022


Net income




279,587


279,587


(4,996

)

274,591


Other comprehensive loss, net of taxes



(8,289

)


(8,289

)


(8,289

)

Contributions from noncontrolling interests





-


16,189


16,189


Distributions to noncontrolling interests





-


(7,277

)

(7,277

)

Deconsolidation of asset management entities





-


(8,193

)

(8,193

)

Change in interest in consolidated subsidiary


(1,092

)



(1,092

)

1,092


-


Share-based compensation expense


74,087




74,087



74,087


Change in fair value of redeemable noncontrolling interests


(26,325

)



(26,325

)


(26,325

)

Purchase of common shares for treasury

(5,953

)

(119,801

)



(125,754

)


(125,754

)

Dividends ($.25 per common share)




(94,674

)

(94,674

)


(94,674

)

Other

1,071


442




1,513




1,513


Balance, December 31, 2015

362,617


4,986,819


438,793


4,612,982


10,401,211


64,679


10,465,890


Net income




125,938


125,938


(1,426

)

124,512


Other comprehensive loss, net of taxes



(128,096

)


(128,096

)


(128,096

)

Contributions from noncontrolling interests





-


154,522


154,522


Distributions to noncontrolling interests





-


(18,544

)

(18,544

)

Deconsolidation of asset management entities





-


(9,709

)

(9,709

)

Change in interest in consolidated subsidiary


(261

)



(261

)

261


-


Reclassification to redeemable noncontrolling interest

-


(14,234

)

(14,234

)

Share-based compensation expense


33,597




33,597



33,597


Change in fair value of redeemable noncontrolling interests


(115,963

)



(115,963

)


(115,963

)

Purchase of common shares for treasury

(5,434

)

(89,586

)



(95,020

)


(95,020

)

Dividends ($.25 per common share)




(93,529

)

(93,529

)


(93,529

)

Other

2,242


(2,019

)



223




223


Balance, December 31, 2016

$

359,425


$

4,812,587


$

310,697


$

4,645,391


$

10,128,100


$

175,549


$

10,303,649




The accompanying notes are an integral part of these consolidated financial statements.

F- 8


LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements


Note 1.  Nature of Operations

Leucadia National Corporation ("Leucadia" or the "Company") is a diversified holding company focused on long-term value creation to maximize shareholder value.  We continuously review acquisitions of businesses, securities and assets that have the potential for significant long-term value creation, invest in a broad array of businesses, and evaluate the retention and disposition of our existing operations and holdings.  Changes in the mix of our businesses and investments should be expected.


Our financial services businesses and investments include Jefferies (investment banking and capital markets), Leucadia Asset Management (asset management), Berkadia (commercial mortgage banking, investment sales and servicing), FXCM (provider of online foreign exchange trading services), HomeFed (a publicly traded real estate company) and Foursight Capital (vehicle finance).  We also own and have investments in a diverse array of other businesses, including National Beef (beef processing), HRG Group ("HRG") (insurance and consumer products), Vitesse Energy and Juneau Energy (oil and gas exploration and development), Garcadia (automobile dealerships), Linkem (fixed wireless broadband services in Italy), Conwed Plastics ("Conwed") and Idaho Timber (manufacturing companies), and Golden Queen (gold and silver mining project). The structure of each of our investments was tailored to the unique opportunity each transaction presented. Our 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.


Jefferies is a global full-service, integrated securities and investment banking firm.  In March 2013, Jefferies became an indirect wholly-owned subsidiary of Leucadia, yet retains a separate credit rating and continues to be a separate SEC reporting company.  Through Jefferies, we own 50% of Jefferies Finance LLC ("Jefferies Finance"), our joint venture with Babson Capital Management LLC (now Barings, LLC) and Massachusetts Mutual Life Insurance Company.  Jefferies Finance is a commercial finance company whose primary focus is the origination and syndication of senior secured debt of middle market and growth companies in the form of term and revolving loans.  Through Jefferies, we also own a 48.5% voting interest in Jefferies LoanCore, a joint venture with the Government of Singapore Investment Corporation, the Canadian Pension Plan Investment Board and LoanCore, LLC.  Jefferies LoanCore originates, purchases and securitizes commercial real estate loans throughout the U.S.


Jefferies has a November 30 th year-end, which it retains for standalone reporting purposes.  We reflect Jefferies in our consolidated financial statements utilizing a one month lag.  We have reviewed Jefferies business and internal operating results for the month of December 2016 for the purpose of evaluating whether additional financial statement disclosures or adjustments are required to this Annual Report on Form 10-K, and we have concluded that no additional adjustments are warranted.


Leucadia Asset Management supports and develops focused alternative asset management businesses led by distinct management teams. These primarily include Folger Hill Asset Management LLC ("Folger Hill"), a multi-manager discretionary long/short equity hedge fund platform; Topwater Capital, a first-loss product; 54 Madison Capital, LLC ("54 Madison"), which invests in real estate projects; CoreCommodity Management LLC, an asset manager that focuses on commodities strategies; Tenacis Capital, a systematic macro investment platform; Lake Hill, an electronic trader in listed options and futures across asset classes; as well as several other smaller businesses. In addition, several investment management businesses, including Jefferies Strategic Investments Division, operate under Jefferies and are included under our marketing of the LAM platform.


Prior to September 1, 2016, our investment in FXCM Group, LLC ("FXCM") and associated companies consisted of a senior secured term loan due January 2017, with rights to a variable proportion of certain future distributions. On September 1, 2016, we, FXCM Inc. and FXCM Holdings, LLC ("FXCM Holdings") entered into an agreement that amended the terms of our loan and associated rights. Among other changes, the amendments extended the maturity of the term loan by one year to January 2018 to allow FXCM more time to optimize remaining asset sales ( $154.5 million was outstanding under this loan at December 31, 2016 ); gave Leucadia a 49.9% common membership interest in FXCM and up to 65% of all distributions; created a six -member board for FXCM, comprised of three directors appointed by Leucadia and three directors appointed by FXCM Holdings; put in place a long-term incentive program for FXCM's senior management; entered into a management agreement pursuant to which FXCM Holdings will manage the assets and day-to-day operations of FXCM and its subsidiaries; and gave FXCM Holdings the same right Leucadia has to require a sale of FXCM beginning in January 2018. See Notes 4 and 10 to our consolidated financial statements for additional information.


Berkadia, our 50 -50 equity method joint venture with Berkshire Hathaway Inc., is a U.S. commercial real estate company providing capital solutions, investment sales advisory and mortgage servicing for multifamily and commercial properties.



F- 9



We own an approximate 65% equity method interest of HomeFed, which owns and develops residential and mixed use real estate properties.  HomeFed is a public company traded on the NASD OTC Bulletin Board. During 2014, we sold substantially all of our standalone real estate operations to HomeFed; see Notes 10 and 28 for more information.


We own 100% of Foursight Capital, an auto loan originator and servicer, and 85% of Chrome Capital, which owns and manages a portfolio of leases on used Harley-Davidson motorcycles and is in the process of winding down.


We own 78.9% of National Beef Packing Company.  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.  National Beef operates two beef processing facilities, three consumer-ready facilities and a wet blue tanning facility, all located in the U.S. National Beef operates one of the largest wet blue tanning facilities in the world that sells processed hides to tanners that produce finished leather for the automotive, luxury goods, apparel and furniture industries.  National Beef owns Kansas City Steak Company, LLC, which sells portioned beef and other products directly to customers through the internet, direct mail and direct response television.  National Beef also owns a refrigerated and livestock transportation and logistics company that provides transportation services for National Beef and third parties.


We own approximately 23% of HRG, a publicly traded company (NYSE: HRG), and we reflect this investment at fair value based on quoted market prices. HRG primarily owns approximately 58% of Spectrum Brands, a publicly traded (NYSE: SPB) global consumer products company; an approximately 80% ownership stake in Fidelity & Guaranty Life ("FGL"), a publicly traded (NYSE: FGL) life insurance and annuity products company; and Front Street, a long-term reinsurance company. On November 8, 2015, FGL and Anbang Insurance Group Co., Ltd. ("Anbang") entered into a definitive merger agreement pursuant to which Anbang will acquire FGL for $26.80 per share in cash. In February 2017, FGL and Anbang amended the merger agreement which extends the outside termination date to April 17, 2017. The amendment also gives FGL the right to solicit, respond to, evaluate and negotiate competing offers, but provides that FGL may not sign a competing definitive agreement prior to the termination date.


Vitesse Energy, LLC ("Vitesse") is our 96% owned consolidated subsidiary that acquires and develops non-operated working and royalty oil and gas interests in the Bakken Shale oil field in North Dakota and Montana as well as the Denver-Julesburg Basin in Wyoming.


Juneau Energy, LLC ("Juneau") is our 98% owned consolidated subsidiary that engages in the exploration, development and production of oil and gas from onshore, unconventional resource areas.  Juneau currently has non-operated working interests and acreage in the Texas Gulf Coast region.


Garcadia is an equity method joint venture that owns and operates 28 automobile dealerships in California, Texas, Iowa and Michigan. We own approximately 75% .


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 57% of Linkem's common equity at December 31, 2016 .  Linkem provides residential broadband services using LTE technologies deployed over the 3.5 GHz spectrum band.  Linkem operates in Italy, which has few cable television systems and poor broadband alternatives. Linkem is accounted for under the equity method.


Conwed is our consolidated subsidiary that manufactures and markets lightweight plastic netting used for building and construction, erosion and sediment control, packaging, agricultural purposes, carpet padding, filtration, consumer products and other purposes.  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 over five years of up to $40 million in cash to the extent the results of Conwed's subsidiary, Filtrexx International, exceed certain performance thresholds. The pre-tax gain of approximately $180 million recognized upon closing will be reflected in our results of operations for the three months ended March 31, 2017. See also Note 29 for more information.

Idaho Timber is our consolidated subsidiary engaged in the manufacture and distribution of various wood products, including the following principal activities:  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. 


Golden Queen Mining Company, LLC ("Golden Queen") owns the Soledad Mountain project, an open pit, heap leach gold and silver mining project in Kern County, California, which commenced gold and silver production in March 2016.  We and the Clay family have formed and made contributions to a limited liability company, controlled by us, through which we invested in Golden Queen for the development and operation of the project. Our effective ownership of Golden Queen is approximately 35% and is accounted for under the equity method.


F- 10




Certain amounts have been reclassified to be consistent with the 2016 presentation.

Note 2.  Significant Accounting Policies

The preparation of these financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") requires us to make estimates and assumptions that affect the reported amounts in the financial statements and disclosures of contingent assets and liabilities.  On an on-going basis, we evaluate all of these estimates and assumptions.  The most important of these estimates and assumptions relate to fair value measurements, compensation and benefits, asset impairment, the ability to realize deferred tax assets, the recognition and measurement of uncertain tax positions and contingencies.  Although these and other estimates and assumptions are based on the best available information, actual results could be different from these estimates.

Consolidation

Our policy is to consolidate all entities in which we can vote a majority of the outstanding voting stock.  In addition, we consolidate entities which meet the definition of a variable interest entity 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.  We consider special allocations of cash flows and preferences, if any, to determine amounts allocable to noncontrolling interests.  All intercompany transactions and balances are eliminated in consolidation.

In situations where we have significant influence, but not control, of an entity that does not qualify as a variable interest entity, we apply either the equity method of accounting or fair value accounting pursuant to the fair value option election under GAAP.  We have also formed nonconsolidated investment vehicles with third-party investors that are typically organized as partnerships or limited liability companies.  Our subsidiaries may 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.

Revenue Recognition Policies

Beef Processing and Other Operations

Revenues are recognized when the following conditions are met: (1) collectibility is reasonably assured; (2) title to the product has passed or the service has been rendered and earned; (3) persuasive evidence of an arrangement exists; and (4) there is a fixed or determinable price.  National Beef's revenues are recognized based on the terms of the sale, which for beef processing operations is typically upon delivery to customers.  Manufacturing revenues are recognized when title passes.

Investment Banking Activities

Commissions and Other Fees. All customer securities transactions are reported in 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.  These arrangements are accounted for on an accrual basis and, as we are not the primary obligor for these arrangements, netted against commission revenues in the Consolidated Statements of Operations.  In addition, we earn asset-based fees associated with the management and supervision of assets, account services and administration related to customer accounts.

Principal Transactions. Trading assets and trading liabilities are carried at fair value with gains and losses reflected in Principal transactions in the Consolidated Statements of Operations on a trade date basis.  Fees received on loans carried at fair value are also recorded within Principal transactions.

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.  Expenses are recorded net of client reimbursements and netted against revenues.  Unreimbursed expenses with no related revenues are included in Selling, general and administrative expenses in the Consolidated Statements of Operations.


F- 11



Interest Revenue and Expense.   Interest expense that is deducted from Revenues to arrive at Net revenues is related to Jefferies operations.  Contractual interest on Trading assets and Trading liabilities is recognized on an accrual basis as a component of Interest income and Interest expense.  Interest flows on derivative trading transactions and dividends are included as part of the fair valuation of these contracts and recognized in Principal transactions in the Consolidated Statements of Operations rather than as a component of interest income or expense.  Interest on short- and long-term borrowings is recorded on an accrual basis as Interest expense. Discounts/premiums arising on long-term debt are accreted/amortized to Interest expense using the effective yield method over the remaining lives of the underlying debt obligations.  Interest revenue related to Securities borrowed and Securities purchased under agreements to resell activities and interest expense related to Securities loaned and Securities sold under agreements to repurchase activities are recognized on an accrual basis.

Cash Equivalents

Cash equivalents include highly liquid investments, including money market funds and certificates of deposit, 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 LLC, 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.  Certain other entities are also obligated by rules mandated by their primary regulators to segregate or set aside cash or equivalent securities to satisfy regulations, promulgated to protect customer assets. In addition, certain exchange and/or clearing organizations require cash and/or securities to be deposited by us to conduct day to day activities.

Financial Instruments and Fair Value

Trading assets and Trading liabilities are recorded at fair value, either as required by accounting pronouncements or through the fair value option election.  Gains and losses on trading assets and trading liabilities are recognized in our Consolidated Statements of Operations in Principal transactions.  Available for sales securities are reflected at fair value, with unrealized gains and losses reflected as a separate component of equity, net of taxes.  When sold, realized gains and losses on available for sale securities are reflected in the caption Net realized securities gains.  The cost of securities sold is based on average cost.  Fair value 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).

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 fair values for which have been derived using model inputs that 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.


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, the financial instrument is valued at the point within the bid-ask range that meets our best estimate of fair value.  We use prices and inputs that are current as of the measurement date.  For financial instruments that do not have readily determinable fair values using quoted market prices,


F- 12



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 of financial instruments may include the use of valuation models and other techniques.  Adjustments to valuations derived from valuation models may be made when, in management's judgment, features of the financial instrument such as its complexity, the market in which the financial instrument is traded and risk uncertainties about market conditions require that an adjustment be made to the value derived from the models.  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 value would also consider in valuing that same financial instrument.  To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.


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.  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.  The degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.

Valuation Process for Financial Instruments

The Jefferies Independent Price Verification ("IPV") Group, which is part of the Jefferies finance department, in partnership with Jefferies Risk Management, is responsible for establishing Jefferies valuation policies and procedures.  The IPV Group and Risk Management, which are independent of business functions, play an important role and serve as a control function in determining that Jefferies financial instruments are appropriately reflected at fair value.  This is particularly important where prices or valuations that require inputs are less observable. In the event that observable inputs are not available, the control processes are designed to assure that the valuation approach utilized is appropriate and consistently applied and that the assumptions are reasonable.  The IPV Group reports to the Jefferies Global Controller and is subject to the oversight of the IPV Committee, which includes senior members of Jefferies finance department and other personnel.  Jefferies independent price verification policies and procedures are reviewed, at a minimum, annually and changes to the policies require the approval of the IPV Committee.


Price Testing Process .  Jefferies business units are responsible for determining the fair value of Jefferies financial instruments using approved valuation models and methodologies.  In order to ensure that the business unit valuations represent a fair value exit price, the IPV Group tests and validates the fair value of the financial instruments inventory.  In the testing process, the IPV Group obtains prices and valuation inputs from sources independent of Jefferies, consistently adheres to established procedures set forth in the valuation policies for sourcing prices and valuation inputs and utilizing valuation methodologies.  Sources used to validate fair value prices and inputs include, but are not limited to, exchange data, recently executed transactions, pricing data obtained from third party vendors, pricing and valuation services, broker quotes and observed comparable transactions.


To the extent discrepancies between the business unit valuations and the pricing or valuations resulting from the price testing process are identified, such discrepancies are investigated by the IPV Group and fair values are adjusted, as appropriate.  The IPV Group maintains documentation of its testing, results, rationale and recommendations and prepares a monthly summary of its valuation results.  This process also forms the basis for the classification of fair values within the fair value hierarchy (i.e., Level 1, Level 2 or Level 3).  The IPV Group utilizes the additional expertise of Risk Management personnel in valuing more complex financial instruments and financial instruments with less or limited pricing observability.  The results of the valuation testing are reported to the IPV Committee on a monthly basis, which discusses the results and determines the financial instrument fair values in the consolidated financial statements.  This process specifically assists management in asserting as to the fair presentation of our financial condition and results of operations as included within our Quarterly Reports on Form 10-Q and Annual Report on Form 10-K.  At each quarter end, the overall valuation results, as determined by the IPV Committee, are presented to the Jefferies Audit Committee.


Judgment exercised in determining Level 3 fair value measurements is supplemented by daily analysis of profit and loss performed by the Product Control functions.  Gains and losses, which result from changes in fair value, are evaluated and corroborated daily based on an understanding of each trading desk's overall risk positions and developments in a particular market on the given day.  Valuation techniques generally rely on recent transactions of suitably comparable financial instruments and use the observable inputs from those comparable transactions as a validation basis for Level 3 inputs.  Level 3 fair value measurements are further validated through subsequent sales testing and market comparable sales, if such information is available.  Level 3 fair value measurements require documentation of the valuation rationale applied, which is reviewed for consistency in application from period to period.



F- 13



Third Party Pricing Information .  Pricing information obtained from external data providers (including independent pricing services and brokers) 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 by the IPV Group 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.  Jefferies processes challenges the appropriateness of pricing information obtained from external data providers (including independent pricing services and brokers) to validate the data for consistency with the definition of a fair value exit price.  Jefferies process includes understanding and evaluating the external data providers' valuation methodologies.  For corporate, U.S. government and agency, municipal debt securities, and loans, to the extent independent pricing services or broker quotes are utilized in Jefferies valuation process, the vendor service providers are collecting and aggregating observable market information as to recent trade activity and active bid-ask submissions.  The composite pricing information received from the independent pricing service is thus not based on unobservable inputs or proprietary models.  For mortgage- and other asset-backed securities, collateralized debt obligations ("CDOs") and collateralized loan obligations ("CLOs"), the independent pricing services use a matrix evaluation approach incorporating both observable yield curves and market yields on comparable securities as well as implied inputs from observed trades for comparable securities in order to determine prepayment speeds, cumulative default rates and loss severity.  Further, Jefferies considers pricing data from multiple service providers as available as well as compares pricing data to prices observed for recent transactions, if any, in order to corroborate valuation inputs.


Model Review Process .  If a pricing model is used to determine fair value, the pricing model is reviewed for theoretical soundness and appropriateness by Risk Management, independent from the trading desks, and then approved by Risk Management to be used in the valuation process.  Review and approval of a model for use may include benchmarking the model against relevant third party valuations, testing sample trades in the model, backtesting the results of the model against actual trades and stress-testing the sensitivity of the pricing model using varying inputs and assumptions.  In addition, recently executed comparable transactions and other observable market data are considered for purposes of validating assumptions underlying the model.  Models are independently reviewed and validated by Risk Management annually or more frequently if market conditions or use of the valuation model changes.

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 at fair value based on the net asset value ("NAV") of the funds provided by the fund managers with gains or losses included in the Consolidated Statements of Operations.

Asset management fees and investment income from managed funds include revenues we earn from management, administrative and performance fees from funds and accounts 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 (or reversed) on a monthly basis based on measuring performance to date versus any relevant benchmark return hurdles stated in the investment management agreement.  Performance fees are not subject to adjustment once the measurement period ends (generally annual periods) and the performance fees have been realized.

Loans to and Investments in Associated Companies

Loans to and investments in associated companies include investments in private equity and other operating entities in which we exercise significant influence over operating and capital decisions and loans issued in connection with such investments.  Loans to and investments in associated companies are accounted for using the equity method.  See Note 10 for additional information regarding certain of these investments.

Under the equity method of accounting, our share of the investee's underlying net income or loss is recorded as Income (loss) related to associated companies, or as part of Other revenues if such investees are considered to be an extension of our business.  Income (loss) for investees for which the fair value option was elected is reported as Principal transactions revenues.



F- 14



Receivables and Provision for Doubtful Accounts

At December 31, 2016 and 2015 , Receivables include receivables from brokers, dealers and clearing organizations of $2,062.9 million and $1,616.3 million , respectively, and receivables from customers of securities operations of $843.1 million and $1,191.3 million , respectively.

During the fourth quarter of 2014, Jefferies recognized a bad debt provision, which primarily relates to a receivable of $52.3 million from a client to which Jefferies provided futures clearing and execution services, which declared bankruptcy.

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, Jefferies borrows 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.  Jefferies has an active securities borrowed and lending matched book business in which it borrows securities from one party and lends them to another party.  When Jefferies borrows securities, it generally provides cash to the lender as collateral, which is reflected in the Consolidated Statements of Financial Condition as Securities borrowed.  Jefferies earns interest revenues on this cash collateral.  Similarly, when Jefferies lends securities to another party, that party provides cash to Jefferies as collateral, which is reflected in the Consolidated Statements of Financial Condition as Securities loaned.  Jefferies pays 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.  Jefferies monitors the fair value of the securities borrowed and loaned on a daily basis and requests additional collateral or returns 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 resale or repurchase amount plus accrued interest.  Jefferies earns and incurs interest over the term of the repo, which is reflected in Interest revenue and Interest expense in the Consolidated Statements of Earnings on an accrual basis. Repos are presented in the Consolidated Statements of Financial Condition on a net-basis-by counterparty, where permitted by GAAP.  The fair value of the underlying securities is monitored daily versus the related receivable or payable balances.  Should the fair value of the underlying securities decline or increase, additional collateral is requested or excess collateral is returned, as appropriate.

Property, Equipment and Leasehold Improvements

Property, equipment and leasehold improvements are stated at cost, net of accumulated depreciation and amortization.  Depreciation and amortization are provided principally on the straight-line method over the estimated useful lives of the assets or, if less, the term of the underlying lease.

Impairment of Long-Lived Assets

We evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate, in management's judgment, that the carrying value of such assets may not be recoverable.  When testing for impairment, we group our long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (or asset group).  The determination of whether an asset group is recoverable is based on management's estimate of undiscounted future cash flows directly attributable to the asset group as compared to its carrying value.  If the carrying amount of the asset group is greater than the undiscounted cash flows, an impairment loss would be recognized for the amount by which the carrying amount of the asset group exceeds its estimated fair value.

National Beef closed its Brawley beef processing facility in the second quarter of 2014.  National Beef incurred costs relating to the closing of the facility during 2014 of $6.9 million .  These costs include employee separation and retention, systems decommissioning and various other expenses.  Of these amounts, $4.6 million related to employee separation, which is included in Compensation and benefits, and the various other costs are included in Selling, general and other expenses in the Consolidated Statement of Operations.

In 2015, we recorded impairment charges in Selling, general and other expenses of $27.7 million , primarily related to a $20.3 million impairment at our Juneau oil and gas company and an impairment charge related to the Brawley plant of $4.7 million . For the oil and gas impairment test, we compare expected undiscounted future net cash flows to the unamortized capitalized cost of


F- 15



the asset. If the future undiscounted net cash flows are lower than the unamortized capital cost, we reduce the capitalized cost to fair market value. We used a third party reserve report in which the cash flows were calculated using West Texas Intermediate (oil) and Henry Hub (gas) NYMEX futures prices as of December 31, 2015. For one of our oil fields, the undiscounted net cash flows were lower than the unamortized capital cost and as a result, we wrote off the total capital cost. There were no significant impairment charges in 2014.

In 2016, Juneau recorded impairment charges in Selling, general and other expenses of $56.3 million related to write-downs of unproved oil and gas properties. Juneau assesses its unproved oil and gas properties for impairment based on remaining lease terms, drilling results or future plans to develop acreage and they record impairment expense for any decline in value. In the third quarter of 2016, Juneau curtailed development of its southern acreage in the East Eagle Ford and its Houston County acreage. As a result, an impairment was recorded for the difference between the carrying value and the estimated net realizable value of the acreage.

Substantially all of our operating businesses sell products or services that are impacted by general economic conditions in the U.S. and to a lesser extent internationally.  In recent years general economic conditions reduced the demand for products or services sold by our operating subsidiaries and/or resulted in reduced pricing for products or services.  A worsening of current economic conditions could cause a decline in estimated future cash flows expected to be generated by our operations and investments.  If future undiscounted cash flows are estimated to be less than the carrying amounts of the asset groups used to generate those cash flows in subsequent reporting periods, particularly for those with large investments in intangible assets, property and equipment and other long-lived assets (for example, Jefferies, National Beef, manufacturing, oil and gas exploration and development and certain associated company investments), impairment charges would have to be recorded.

Intangible Assets, Net and Goodwill

Intangible Assets .  Intangible assets deemed to have finite lives are generally amortized on a straight line basis over their estimated useful lives, where the useful life is the period over which the asset is expected to contribute directly, or indirectly, to our future cash flows.  Intangible assets are reviewed for impairment on an interim basis when certain events or circumstances exist.  If future undiscounted cash flows are estimated to be less than the carrying amounts of the asset groups used to generate those cash flows in subsequent reporting periods, particularly for those with large investments in amortizable intangible assets, impairment charges would have to be recorded.

An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when certain events or circumstances exist indicating an assessment for impairment is necessary.  Impairment exists when the carrying amount exceeds its fair value.  Fair value will be determined using valuation techniques consistent with what a market participant would use.  All of our indefinite-lived intangible assets were recognized in connection with the Jefferies acquisition, and our annual impairment testing date for Jefferies is as of August 1.

Goodwill.  At acquisition, we allocate the cost of a business acquisition to the specific tangible and intangible assets acquired and liabilities assumed based upon their fair values.  Significant judgments and estimates are often made by management to determine these values, and may include the use of appraisals, consideration of market quotes for similar transactions, use of discounted cash flow techniques or consideration of other information we believe to be relevant.  Any excess of the cost of a business acquisition over the fair values of the net assets and liabilities acquired is recorded as goodwill, which is not amortized to expense.  Substantially all of our goodwill was recognized in connection with the Jefferies acquisition.

At least annually, and more frequently if warranted, we will assess whether goodwill has been impaired.  If the estimated fair value exceeds the carrying value, goodwill at the reporting unit level is not impaired.  If the estimated fair value is less than carrying value, further analysis is necessary to determine the amount of impairment, if any, by comparing the implied fair value of the reporting unit's goodwill to the carrying value of the reporting unit's goodwill.  The fair values will be based on widely accepted valuation techniques that we believe market participants would use, although the valuation process requires significant judgment and often involves the use of significant estimates and assumptions.  The methodologies we utilize in estimating fair value include market capitalization, price-to-book multiples of comparable exchange traded companies, multiples of merger and acquisitions of similar businesses and/or projected cash flows.  The estimates and assumptions used in determining fair value could have a significant effect on whether or not an impairment charge is recorded and the magnitude of such a charge.  Adverse market or economic events could result in impairment charges in future periods.  Our annual goodwill impairment testing date related to Jefferies is as of August 1 and National Beef as of December 31.

See Note 12 for further information with respect to our impairment charges related to intangible assets during 2015 and 2016.



F- 16



Inventories and Cost of Sales

National Beef's inventories consist primarily of beef products, beef by-products and supplies, and are stated at the lower of cost or market, with cost principally determined under the first-in-first-out method for beef products and average cost for supplies.

Manufacturing inventories are stated at the lower of cost or market, with cost principally determined under the first-in-first-out method.  Manufacturing cost of sales principally includes product and manufacturing costs, inbound and outbound shipping costs and handling costs.

Payables, expense accruals and other liabilities

At December 31, 2016 and 2015 , Payables, expense accruals and other liabilities include payables to brokers, dealers and clearing organizations of $3,290.4 million and $2,757.2 million , respectively, and payables to customers of securities operations of $2,297.3 million and $2,780.5 million , respectively.

Income Taxes

We record a valuation allowance to reduce our net deferred tax asset to the net amount that is more likely than not to be realized.  If in the future we determine that it is more likely than not that we will be able to realize our net deferred tax asset in excess of our net recorded amount, an adjustment to increase the net deferred tax asset would increase income in such period.  If in the future we were to determine that we would not be able to realize all or part of our recorded net deferred tax asset, an adjustment to decrease the net deferred tax asset would be charged to income in such period.  We are required to consider all available evidence, both positive and negative, and to weigh the evidence when determining whether a valuation allowance is required and the amount of such valuation allowance.  Generally, greater weight is required to be placed on objectively verifiable evidence when making this assessment, in particular on recent historical operating results.

Our estimate of future taxable income considers all available evidence, both positive and negative, about our operating businesses and investments, includes an aggregation of individual projections for each significant operating business and investment, estimated apportionment factors for state and local taxing jurisdictions and included all future years that we estimate we will have available net operating loss carryforwards ("NOLs") (until 2035).  We believe that our estimate of future taxable income is reasonable but inherently uncertain, and if our current or future operations and investments generate taxable income different than the projected amounts, further adjustments to the valuation allowance are possible.  The current balance of the deferred tax valuation allowance principally reserves for NOLs of certain subsidiaries that are not available to offset income generated by other members of the consolidated tax return group.

We also record reserves for unrecognized tax benefits based on our assessment of the probability of successfully sustaining tax filing positions.  Interest and penalties, if any, are recorded as components of income tax expense.  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 could be significant to our Consolidated Statement of Financial Condition or results of operations.

Share-based Compensation

Share-based awards are measured based on the fair value of the award as determined in accordance with GAAP and recognized over the required service or vesting period.  Certain executive share-based awards contain market, performance and service conditions. Market conditions are incorporated into the grant-date fair value using a Monte Carlo valuation model. Compensation expense for awards with market conditions is recognized over the service period and is not reversed if the market condition is not met. Awards with performance conditions are amortized over the service period if it is determined that it is probable that the performance condition will be achieved. The fair value of options and warrants are estimated at the date of grant using the Black-Scholes option pricing model.  Expected forfeitures are included in determining share-based compensation expense.

Foreign Currency Translation

Assets and liabilities of foreign subsidiaries are translated to U.S. dollars using the currency exchange rates at the end of the relevant period.  Revenues and expenses are translated at average exchange rates during the period.  The effects of exchange rate changes on the translation of the balance sheets, net of hedging gains or losses and taxes, if any, are included in other comprehensive income (loss) in the Consolidated Statements of Comprehensive Income (Loss) and classified as Accumulated other comprehensive income in the Consolidated Statements of Financial Condition and Consolidated Statements of Changes in Equity.  Gains or losses


F- 17



resulting from Jefferies foreign currency transactions are included in Principal transactions in the Consolidated Statements of Operations; gains or losses from foreign currency transactions unrelated to Jefferies were not significant.

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 ("RSUs") 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 shares and interest on convertible notes 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 earnings per share.  Restricted stock and RSUs granted as part of share-based compensation 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 RSUs meet the definition of a participating security.  As such, we calculate basic and diluted earnings per share under the two-class method. RSUs granted under the senior executive compensation plan are not considered participating securities as the rights to dividend equivalents are forfeitable. See Note 18 for more information regarding the senior executive compensation plan.

Securitization Activities

Jefferies engages in securitization activities related to corporate loans, consumer loans, commercial mortgage loans and mortgage-backed and other asset-backed securities.  Such transfers of financial assets are accounted for as sales when Jefferies has 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.  Jefferies may retain interests in the securitized financial assets as one or more tranches of the securitization.  These retained interests are included within Trading assets in the Consolidated Statements of Financial Condition at fair value. Any changes in the fair value of such retained interests are recognized within Principal transactions in the Consolidated Statements of Operations.

When a transfer of assets does not meet the criteria of a sale, the transfer is accounted for as a secured borrowing and Jefferies continues to recognize the assets of a secured borrowing, and recognize the associated financing in Other secured financings in the Consolidated Statements of Financial Condition.

Beginning in 2014, another of our subsidiaries utilized a special purpose entity to securitize automobile loans receivable.  This special purpose entity is a variable interest entity and our subsidiary is the primary beneficiary; the related assets and the secured borrowings are recognized in the Consolidated Statement of Financial Condition.  These secured borrowings do not have recourse to our subsidiary's general credit.

Contingencies

In the normal course of business, we have been named, from time to time, as a defendant in legal and regulatory proceedings.  We are also involved, from time to time, in other exams, investigations and similar reviews (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 when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated.  If the reasonable estimate of a probable loss is a range, we accrue the most likely amount of such loss, and if such amount is not determinable, then we accrue the minimum in the range as the loss accrual.  The determination of the outcome and loss estimates requires significant judgment on the part of management, can be highly subjective and is subject to significant change with the passage of time as more information becomes available.  Estimating the ultimate impact of litigation matters is inherently uncertain, in particular because the ultimate outcome will rest on events and decisions of others that may not be within our power to control.  We do not believe that any of our current litigation will have a significant adverse effect on our consolidated financial position, results of operations or liquidity; however, if amounts paid at the resolution of litigation are in excess of recorded


F- 18



reserve amounts, the excess could be significant in relation to results of operations for that period.  For further information, see Note 25.

Note 3.  Accounting Developments

Revenue Recognition.   In May 2014, the Financial Accounting Standards Board ("FASB") issued new guidance that defines how companies report revenues from contracts with customers, and also requires enhanced disclosures.  The core principle of this new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.  This guidance is effective for interim and annual periods beginning after December 15, 2017.  We intend to adopt the new guidance with a cumulative-effect adjustment to opening retained earnings and our evaluation of the impact this new guidance will have on our consolidated financial statements is ongoing.


Consolidation.  In January 2016, we adopted the FASB's new guidance that amended the consolidation guidance including changes to both the variable and voting interest models used to evaluate whether an entity should be consolidated.  This guidance also eliminates the deferral of certain consolidation standards for entities considered to be investment companies.  The adoption of this guidance did not have a significant impact on our consolidated financial statements.


Debt Issuance Costs.  In January 2016, we adopted the FASB's new guidance that requires debt issuance costs related to a recognized debt liability be presented in the Consolidated Statements of Financial Condition as a direct deduction from the carrying amount of that debt liability.  The guidance is effective retrospectively and we have adopted this guidance in the first quarter of 2016. The adoption of this guidance resulted in the following adjustments to the Consolidated Statement of Financial Condition on December 31, 2015: a decrease of $8.6 million to Other assets, a decrease of $7.0 million to Long-term debt and a decrease of $1.6 million to Other secured financings. The adoption of this guidance also resulted in the following adjustments to the Consolidated Statements of Operations for the years ended December 31, 2015 and 2014: a decrease of $4.4 million and $3.8 million , respectively, to Selling, general and other expenses and an increase of $4.4 million and $3.8 million , respectively, to Interest expense.


Financial Instruments. In January 2016, the FASB issued new guidance that affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. The guidance is effective for annual and interim periods beginning after December 15, 2017. We are currently evaluating the impact of the new guidance related to equity investments and the presentation and disclosure requirements of financial instruments on our consolidated financial statements. Early adoption is permitted for the accounting guidance on financial liabilities under the fair value option and we adopted this guidance in the first quarter of 2016. The guidance on financial liabilities under the fair value option did not have a significant impact on our consolidated financial statements.


Leases. In February 2016, the FASB issued new guidance that affects the accounting and disclosure requirements for leases. The FASB requires the recognition of lease assets and lease liabilities on the statement of financial condition. The guidance is effective for annual and interim periods beginning after December 15, 2018. We are currently evaluating the impact this new guidance will have on our consolidated financial statements.


Share-Based Payments to Employees. In March 2016, the FASB issued new guidance to simplify and improve accounting for share-based payments. The amendments include income tax consequences, the accounting for forfeitures, classification of awards as either equity or liabilities and classification on the statement of cash flows. The guidance is effective for annual and interim periods beginning after December 15, 2016. We do not believe the adoption of this accounting guidance will have a material effect on our consolidated financial statements.


Financial Instruments - Credit Losses. In June 2016, the FASB issued new guidance for estimating credit losses on certain types of financial instruments by introducing an approach based on expected losses. The guidance is effective for annual and interim periods beginning after December 15, 2019. We are currently evaluating the impact this new guidance will have on our consolidated financial statements.


Cash Flow Classifications. In August 2016, the FASB issued new guidance to reduce the diversity in practice in how certain transactions are classified in the statement of cash flows. The guidance adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The guidance is effective for annual and interim periods beginning after December 15, 2017. In November 2016, the FASB issued new guidance on restricted cash. The guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. The guidance is effective for annual and interim periods beginning after December 15, 2017. We are currently evaluating the impact this new guidance will have on our consolidated financial statements.


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Note 4.  Fair Value Disclosures

The following is a summary of our financial instruments, trading liabilities and long-term debt that are accounted for at fair value on a recurring basis, excluding Investments at fair value based on NAV (within trading assets) of $24.3 million and $36.7 million , respectively, by level within the fair value hierarchy at December 31, 2016 and 2015 (in thousands):

December 31, 2016

Level 1 (1)

Level 2 (1)

Level 3

Counterparty

and

Cash

Collateral

Netting (2)

Total

Assets:

Trading assets, at fair value:

Corporate equity securities

$

2,522,977


$

92,839


$

21,739


$

-


$

2,637,555


Corporate debt securities

-


2,675,020


25,005


-


2,700,025


CDOs and CLOs

-


54,306


54,354


-


108,660


U.S. government and federal agency securities

2,389,397


56,726


-


-


2,446,123


Municipal securities

-


708,469


27,257


-


735,726


Sovereign obligations

1,432,556


990,492


-


-


2,423,048


Residential mortgage-backed securities

-


960,494


38,772


-


999,266


Commercial mortgage-backed securities

-


296,405


20,580


-


316,985


Other asset-backed securities

-


63,587


40,911


-


104,498


Loans and other receivables

-


1,557,233


81,872


-


1,639,105


Derivatives

3,825


4,616,822


6,429


(4,255,998

)

371,078


Investments at fair value

-


-


314,359


-


314,359


Investment in FXCM

-


-


164,500


-


164,500


Total trading assets, excluding investments at fair value based on NAV

$

6,348,755


$

12,072,393


$

795,778


$

(4,255,998

)

$

14,960,928


Available for sale securities:






Corporate equity securities

$

79,425


$

-


$

-


$

-


$

79,425


Corporate debt securities

-


179


-


-


179


U.S. government securities

174,933


-


-


-


174,933


Residential mortgage-backed securities

-


19,133


-


-


19,133


Commercial mortgage-backed securities

-


8,337


-


-


8,337


Other asset-backed securities

-


19,042


-


-


19,042


Total available for sale securities

$

254,358


$

46,691


$

-


$

-


$

301,049


Liabilities:






Trading liabilities:






Corporate equity securities

$

1,593,548


$

16,806


$

313


$

-


$

1,610,667


Corporate debt securities

-


1,718,424


523


-


1,718,947


U.S. government and federal agency securities

976,497


-


-


-


976,497


Sovereign obligations

1,375,590


1,253,754


-


-


2,629,344


Loans

-


801,977


378


-


802,355


Derivatives

2,566


4,867,586


9,870


(4,229,213

)

650,809


Total trading liabilities

$

3,948,201


$

8,658,547


$

11,084


$

(4,229,213

)

$

8,388,619


Other secured financings

$

-


$

41,350


$

418


$

-


$

41,768


Long-term debt - structured notes

$

-


$

248,856


$

-


$

-


$

248,856



F- 20



December 31, 2015

Level 1 (1)

Level 2 (1)

Level 3

Counterparty

and

Cash

Collateral

Netting (2)

Total

Assets:

Trading assets, at fair value:

Corporate equity securities

$

2,803,243


$

133,732


$

40,906


$

-


$

2,977,881


Corporate debt securities

-


2,867,165


25,876


-


2,893,041


CDOs and CLOs

-


89,144


85,092


-


174,236


U.S. government and federal agency securities

2,555,018


90,633


-


-


2,645,651


Municipal securities

-


487,141


-


-


487,141


Sovereign obligations

1,251,366


1,407,955


120


-


2,659,441


Residential mortgage-backed securities

-


2,731,070


70,263


-


2,801,333


Commercial mortgage-backed securities

-


1,014,913


14,326


-


1,029,239


Other asset-backed securities

-


118,629


42,925


-


161,554


Loans and other receivables

-


1,123,044


189,289


-


1,312,333


Derivatives

2,253


4,406,207


19,785


(4,165,446

)

262,799


Investments at fair value

-


26,224


199,794


-


226,018


Investment in FXCM

-


-


625,689


-


625,689


Total trading assets, excluding investments at fair value based on NAV

$

6,611,880


$

14,495,857


$

1,314,065


$

(4,165,446

)

$

18,256,356


Available for sale securities:






Corporate equity securities

$

73,579


$

-


$

-


$

-


$

73,579


Corporate debt securities

-


4,744


-


-


4,744


U.S. government securities

63,945


-


-


-


63,945


Residential mortgage-backed securities

-


23,240


-


-


23,240


Commercial mortgage-backed securities

-


2,374


-


-


2,374


Other asset-backed securities

-


39,473


-


-


39,473


Total available for sale securities

$

137,524


$

69,831


$

-


$

-


$

207,355


Liabilities:






Trading liabilities:






Corporate equity securities

$

1,428,048


$

36,518


$

38


$

-


$

1,464,604


Corporate debt securities

-


1,556,941


-


-


1,556,941


U.S. government and federal agency securities (3)

1,488,121


-


-


-


1,488,121


Sovereign obligations (3)

837,614


505,382


-


-


1,342,996


Residential mortgage-backed securities (3)

-


117


-


-


117


Loans

-


758,939


10,469


-


769,408


Derivatives

364


4,456,334


19,543


(4,257,998

)

218,243


Total trading liabilities

$

3,754,147


$

7,314,231


$

30,050


$

(4,257,998

)

$

6,840,430


Other secured financings (4)

$

-


$

67,801


$

544


$

-


$

68,345


(1)

There were no material transfers between Level 1 and Level 2 during the years ended December 31, 2016 and 2015 .

(2)

Represents counterparty and cash collateral netting across the levels of the fair value hierarchy for positions with the same counterparty.

(3)

There was an immaterial revision in the row labeling in our Annual Report on Form 10-K for the year ended December 31, 2015. We have revised the labels to "U.S. government and federal agency securities" (originally reported as "Collateralized debt obligations"), "Sovereign obligations" (originally reported as "U.S. government and federal agency securities") and "Residential mortgage-backed securities" (originally reported as "Sovereign obligations").

(4)

Level 2 liabilities include $67.8 million of other secured financings that were previously not disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015 .



F- 21



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 closing exchange prices, which are generally obtained from external pricing services, and are categorized within Level 1 of the fair value hierarchy, otherwise they are categorized within Level 2 of the fair value hierarchy.

Non-exchange Traded Equity Securities :  Non-exchange traded equity securities are measured primarily using broker quotations, pricing data from external pricing services 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 within Level 3 of the fair value hierarchy and measured using valuation techniques involving quoted prices of or market data for comparable companies, similar company ratios and multiples (e.g., price/Earnings before interest, taxes, depreciation and amortization ("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 measured primarily using pricing data from external pricing services, prices observed for recently executed market transactions and broker quotations are categorized within Level 2 of the fair value hierarchy. Where such information is not available, non-exchange traded equity warrants are generally categorized 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 pricing data from external pricing services and broker quotations, where available, prices observed for recently executed market transactions 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 categorized within Level 3 of the fair value hierarchy and are 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 categorized within Level 2 of the fair value hierarchy and are measured primarily using broker quotations and pricing data from external pricing services, where available, and prices observed for recently executed market transactions of comparable size.  Where pricing data is less observable, valuations are categorized within 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.


CDOs and CLOs


CDOs and CLOs are measured based on prices observed for recently executed market transactions of the same or similar security or based on valuations received from third party brokers or data providers and are categorized within Level 2 or Level 3 of the fair value hierarchy depending on the observability and significance of the pricing inputs.  Valuation that is based on recently executed market transactions of similar securities incorporates additional review and analysis of pricing inputs and comparability criteria including but not limited to collateral type, tranche type, rating, origination year, prepayment rates, default rates, and loss severity.


U.S. Government and Federal Agency Securities


U.S. Treasury Securities:   U.S. Treasury securities are measured based on quoted market prices and categorized within 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 and are generally categorized within Level 1 or Level 2 of the fair value hierarchy.



F- 22



Municipal Securities


Municipal securities are measured based on quoted prices obtained from external pricing services and are generally categorized within Level 2 of the fair value hierarchy.


Sovereign Obligations


Foreign sovereign government obligations are measured based on quoted market prices obtained from external pricing services, where available, or recently executed independent transactions of comparable size.  To the extent external price quotations are not available or recent transactions have not been observed, valuation techniques incorporating interest rate yield curves and country spreads for bonds of similar issuers, seniority and maturity are used to determine fair value of sovereign bonds or obligations. Foreign sovereign government obligations are classified in Level 1, Level 2 or Level 3 of the fair value hierarchy, primarily based on the country of issuance.


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 and interest-only and principal-only securities and are generally measured using market price quotations from external pricing services and categorized within Level 2 of the fair value hierarchy.

Agency Residential Interest-Only and 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 the 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 IOs are categorized within Level 2 of the fair value hierarchy. We also use vendor data in developing our 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 and significance 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:   Government National Mortgage Association ("GNMA") project loans are measured based on inputs corroborated from and benchmarked to observed prices of recent securitization transactions of similar securities with adjustments incorporating an evaluation for various factors, including prepayment speeds, default rates, and cash flow structures as well as the likelihood of pricing levels in the current market environment. Federal National Mortgage Association ("FNMA") Delegated Underwriting and Servicing ("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 external pricing 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, student loans and other consumer loans and are categorized within Level 2 and Level 3 of the fair value hierarchy.  Valuations are primarily determined using pricing data obtained from external pricing services and broker quotes and prices observed for recently executed market transactions.



F- 23



Loans and Other Receivables


Corporate Loans:   Corporate loans categorized within Level 2 of the fair value hierarchy are measured based on market price quotations where market price quotations from external pricing services are supported by transaction data.  Corporate loans categorized within Level 3 of the fair value hierarchy are measured based on 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 Agency Residential Loans: Valuations of participation certificates in agency residential loans are based on observed market prices of recently executed purchases and sales of similar loans. The loan participation certificates are categorized within Level 2 of the fair value hierarchy given the observability and volume of recently executed transactions and availability of data provider pricing.

Project Loans and Participation Certificates in GNMA Project and Construction Loans:   Valuations of participation certificates in GNMA project and construction loans are based on inputs corroborated from and benchmarked to observed prices of recent securitizations of assets with similar underlying loan collateral to derive an implied spread. Securitization prices are adjusted to estimate the fair value of the loans incorporating an evaluation for various factors, including prepayment speeds, default rates, and cash flow structures as well as the likelihood of pricing levels in the current market environment. The measurements are categorized within Level 2 of the fair value hierarchy given the observability and volume of recently executed transactions.

Consumer Loans and Funding Facilities:  Consumer and small business whole loans and related funding facilities are valued based on observed market transactions incorporating additional valuation inputs including, but not limited to, delinquency and default rates, prepayment rates, borrower characteristics, loan risk grades and loan age. These assets are categorized within Level 2 or 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 of the fair value hierarchy where fair value is based on recent trade activity in the same security.


Derivatives


Listed Derivative Contracts:   Listed derivative contracts that are actively traded are measured based on quoted exchange prices, which are generally obtained from external pricing services, and are categorized within Level 1 of the fair value hierarchy.  Listed derivatives for which there is limited trading activity are measured based on incorporating the closing auction price of the underlying equity security, use similar valuation approaches as those applied to over-the-counter derivative contracts and are categorized within Level 2 of the fair value hierarchy.

OTC Derivative Contracts:   Over-the-counter ("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 within Level 2 of the fair value hierarchy given the observability and significance of the inputs to the valuation models.  Where significant inputs to the valuation are unobservable, derivative instruments are categorized within Level 3 of the fair value hierarchy.


OTC options include OTC equity, foreign exchange, interest rate and commodity options measured using various valuation models, such as the Black-Scholes, with key inputs impacting the valuation including the underlying security, foreign exchange spot rate 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, valuations of our foreign exchange forwards and swaps, which incorporate observable inputs related to foreign currency spot rates and forward curves and valuations of our commodity swaps and forwards, which incorporate observable inputs related to commodity spot prices and forward curves.  Credit default 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 external pricing services.

National Beef Derivatives: National Beef uses futures contracts in order to reduce its exposure associated with entering into firm commitments to purchase live cattle at prices determined prior to the delivery of the cattle as well as firm commitments to sell certain beef products at sales prices determined prior to shipment. The futures contracts and their related firm purchase commitments are accounted for at fair value, which are classified as Level 1 or Level 2 within the fair value hierarchy. Certain firm commitments for live cattle purchases and all firm commitments for sales are treated as normal purchases and sales and


F- 24



therefore not marked to market. Fair values classified as Level 1 are calculated based on the quoted market prices of identical assets or liabilities compared to National Beef's cost of those same assets or liabilities. Fair values classified as Level 2 are calculated based on the difference between the contracted price for live cattle and the relevant quoted market price for live cattle futures.

Oil Futures Derivatives: Vitesse uses swaps and call and put options in order to reduce exposure to future oil price fluctuations. Vitesse accounts for the derivative instruments at fair value, which are classified as Level 2 within the fair value hierarchy. Fair values classified as Level 2 are determined under the income valuation technique using an option-pricing model that is based on directly or indirectly observable inputs.


Investments at Fair Value


Investments at fair value included in Trading assets on the Consolidated Statements of Financial Condition include direct equity investments in private companies, which are measured at fair value 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 analysis and transaction prices observed for subsequent financing or capital issuance by the company.  Direct equity investments in private companies are categorized within Level 2 or Level 3 of the fair value hierarchy.  Additionally, investments at fair value include investments in insurance contracts relating to Jefferies defined benefit plan in Germany.  Fair value for the insurance contracts are determined using a third party and is categorized within Level 3 of the fair value hierarchy. 


Investment in FXCM


In January 2015, we entered into a credit agreement with FXCM, and provided FXCM a $300 million senior secured term loan due January 2017, with rights to a variable proportion of certain future distributions in connection with an FXCM sale of assets or certain other events, and to require a sale of FXCM beginning in January 2018.  FXCM is an online provider of foreign exchange trading services.  The loan had an initial interest rate of 10% per annum, increasing by 1.5% per annum each quarter, not to exceed 20.5% per annum.  The variable proportion of distributions was as follows: 100% until amounts due under the loan are repaid; 50% of the next $350 million ; then 90% of the next $500 million (this was an amount initially set at a range between $500 million to $680 million and based on payments made by FXCM to us through April 16, 2015, this amount became $500 million ); and 60% of all amounts thereafter.  During the year ended December 31, 2016 , we received $72.1 million of principal, interest and fees from FXCM and $154.5 million remained outstanding under the credit agreement as of December 31, 2016 .  Through the first quarter of 2016 interest accrued at 16.0% per annum; in the second quarter of 2016 interest accrued at 17.5% per annum; in the third quarter of 2016 interest accrued at 19.0% per annum; and in the fourth quarter of 2016 interest accrued at 20.5% per annum.


At December 31, 2015, we viewed the FXCM loan and associated rights as one integrated transaction; since the rights, as derivatives, were accounted for at fair value, we had elected the fair value option for the loan.  At December 31, 2015, the total amount of our investment in FXCM was reported within Trading assets, at fair value in our Consolidated Statements of Financial Condition, and unrealized and realized changes in value, including the component related to interest income on the loan, were included within Principal transactions in the Consolidated Statements of Operations.  We recorded in Principal transactions an aggregate $(54.6) million and $491.3 million during the years ended December 31, 2016 and 2015 , respectively, of unrealized and realized gains (losses), interest income and fees relating to our investment in FXCM.

On September 1, 2016, we, FXCM Inc. and FXCM Holdings entered into an agreement that amended the terms of our loan and associated rights. Among other changes, the amendments extended the maturity of the term loan by one year to January 2018 to allow FXCM more time to optimize remaining asset sales; gave Leucadia a 49.9% common membership interest in FXCM, and up to 65% of all distributions; created a six -member board for FXCM, comprised of three directors appointed by Leucadia and three directors appointed by FXCM Holdings; put in place a long-term incentive program for FXCM's senior management; entered into a management agreement pursuant to which FXCM Holdings will manage the assets and day-to-day operations of FXCM and its subsidiaries; and gave FXCM Holdings the same right Leucadia has to require a sale of FXCM beginning in January 2018. Distributions to Leucadia under the amended agreements are now: 100% until amounts due under the loan are repaid; 45% of the next $350 million ; then 79.2% of the next $500 million ; and 51.6% of all amounts thereafter.


During February 2017, FXCM Holdings and FXCM's U.S. subsidiary, Forex Capital Markets LLC ("FXCM U.S.") settled complaints filed by the National Futures Association ("NFA") and the Commodity Futures Trading Commission ("CFTC") against FXCM U.S. and certain of its principals relating to matters that occurred between 2010 and 2014. The NFA settlement has no monetary fine and the CFTC settlement has a $7 million fine. As part of the settlements, FXCM U.S. will be withdrawing from business and has agreed to sell FXCM U.S.'s customer accounts to Gain Capital Holdings, Inc. FXCM U.S. generates approximately 20% of FXCM's revenue, but is not currently profitable. The proceeds from any sale of the U.S. accounts, net of closure and severance costs, as well as regulatory capital released after a sale, will be used to pay down the Leucadia term loan. As part of


F- 25



the settlement, Leucadia, FXCM Holdings and FXCM have amended the management and incentive compensation agreements, giving any three directors of the FXCM board the right to terminate management and any unvested incentive compensation at any time.


On February 21, 2017, Drew Niv resigned as the Chief Executive Officer of FXCM, although he will remain in an advisory position. Brendan Callan will become the interim Chief Executive Officer of FXCM and Leucadia's Jimmy Hallac will become Chairman of the Board of FXCM.


In addition, on February 21, 2017, Mr. Niv resigned from his positions as Chief Executive Officer and Chairman of the Board of FXCM Inc., but will remain as acting Chief Executive Officer of FXCM Inc. until his successor is identified. In addition, FXCM Inc. announced that it will be changing its name to Global Brokerage Inc. effective February 27, 2017.


We do not hold any interest in FXCM Inc., the publicly traded company and issuer of senior convertible notes. FXCM Inc. holds an economic interest of 68.0% in FXCM Holdings, LLC, which in turn holds 50.1% of FXCM Group, LLC. As more fully described above, we own the remaining 49.9% of FXCM Group, LLC, and our senior secured term loan is also with FXCM Group, LLC, which is a holding company for all of FXCM Group, LLC's affiliated operating subsidiaries. Net profits and proceeds generated by these subsidiaries, and from the sales of these subsidiaries, flow first to FXCM Group, LLC, where they are applied to the outstanding balance of our term loan and then, in accordance with the agreement described above, to us and FXCM Holdings, LLC. A portion of the profits and proceeds that flow to FXCM Holdings, LLC then flow to FXCM Inc., in accordance with its economic interest. We refer to FXCM Group, LLC as "FXCM."


Through the amendments on September 1, 2016, our derivative rights were exchanged for a 49.9% common membership interest in FXCM and up to 65% of all distributions. We gained the ability to significantly influence FXCM through our common membership interest and our seats on the board of directors. As a result, we classify our equity investment in FXCM in our December 31, 2016 Consolidated Statement of Financial Condition as Loans to and investments in associated companies. We account for our equity interest on a one month lag. As the amendments only extended the maturity of the term loan, we continue to use the fair value option and classify our term loan within Trading assets, at fair value.


FXCM is considered a variable interest entity ("VIE") and our term loan and equity ownership are variable interests.  We have determined that we are not the primary beneficiary of FXCM because we do not have the power to direct the activities that most significantly impact FXCM's performance.  Therefore, we do not consolidate FXCM and we account for our equity interest as an investment in an associated company.


Our maximum exposure to loss as a result of our involvement with FXCM is limited to the carrying value of the term loan ( $164.5 million ) and the investment in associated company ( $336.3 million ), which totaled $500.8 million at December 31, 2016 .


We engaged an independent valuation firm to assist management in estimating the fair value of our loan to FXCM.  Our estimate of fair value was determined using valuation models with inputs including management's assumptions concerning the amount and timing of expected cash flows and the loan's implied credit rating and effective yield.  Because of these inputs and the degree of judgment involved, we have categorized our term loan in Level 3.  We also engaged an independent valuation firm to assist management in estimating the fair value of our equity interest in FXCM on September 1, 2016. Our estimate of fair value was determined using valuation models with inputs including management's assumptions concerning the implied total equity value, based primarily on the publicly traded FXCM Inc. stock price; volatility; risk-free rate; and term.


Investments at Fair Value Based on NAV and Investments in Managed Funds


Investments at fair value based on NAV and Investments in managed funds include investments in hedge funds, fund of funds, private equity funds, convertible bond funds and other funds, which are measured at the NAV of the funds provided by the fund managers and are excluded from the fair value hierarchy.


F- 26



The following tables present information about our investments in entities that have the characteristics of an investment company and are measured based on NAV (in thousands).

Fair Value (1)

Unfunded

Commitments

Redemption

Frequency

(if currently eligible)

December 31, 2016

Equity Long/Short Hedge Funds (2)

$

363,256


$

-


(2)

Fixed Income and High Yield Hedge Funds (3)

772


-


-

Fund of Funds (4)

230


-


-

Equity Funds (5)

42,179


20,295


-

Multi-strategy Fund (6)

133,190


-


Monthly/Quarterly

Total

$

539,627


$

20,295


December 31, 2015 (7)

Equity Long/Short Hedge Funds (2)

$

430,207


$

-


(2)

Fixed Income and High Yield Hedge Funds (3)

1,703


-


-

Fund of Funds (4)

287


94


-

Equity Funds (5)

42,111


20,791


-

Multi-strategy Fund (6)

165,821


-


Monthly/Quarterly

Convertible Bond Funds (8)

326


-


At Will

Total

$

640,455


$

20,885


(1)

Where fair value is calculated based on NAV, fair value has been derived from each of the funds' capital statements.

(2)

This category includes investments in hedge funds that invest, long and short, in primarily equity securities in domestic and international markets in both the public and private sectors.  At December 31, 2016 and 2015 , investments with a fair value of $363.3 million and $54.7 million , respectively, are redeemable with 15 to 90 days prior written notice.

(3)

This category includes investments in funds that invest in loans secured by a first trust deed on property, domestic and international public high yield debt, private high yield investments, senior bank loans, public leveraged equities, distressed debt, and private equity investments.  There are no redemption provisions.  At December 31, 2015 , the underlying assets of 8% of these funds were being liquidated and we are unable to estimate when the underlying assets will be fully liquidated.

(4)

This category includes investments in fund of funds that invest in various private equity funds.  At December 31, 2016 and 2015 , approximately 100% and 95% , respectively, of the fair value of investments in this category are managed by us and have no redemption provisions. The investments in this category are gradually being liquidated or we have requested redemption, however, we are unable to estimate when these funds will be received.

(5)

At December 31, 2016 and 2015 , the fair value of investments in this category include investments in equity funds that invest in the equity of various U.S. and foreign private companies in the energy, technology, internet service and telecommunication service industries.  These investments cannot be redeemed; instead distributions are received through the liquidation of the underlying assets of the funds, which are expected to liquidate in one to seven years. 

(6)

This category includes investments in hedge funds that invest, long and short, primarily in multi-strategy securities in domestic and international markets in both the public and private sectors. At December 31, 2016 and 2015 , investments representing approximately 12% and 32% , respectively, of the fair value of investments in this category are redeemable with 30 to 90 days prior written notice.

(7)

Certain prior period amounts have been recast to conform to the current year's presentation due to the presentation of multi-strategy funds. Previously, these investments had been classified within equity long/short hedge funds.

(8)

Investment in the Jefferies Umbrella Fund, an open-ended investment company managed by Jefferies that invested primarily in convertible bonds.  The underlying assets were fully liquidated during the year ended December 31, 2016.

Other Secured Financings

Other secured financings that are accounted for at fair value include notes issued by consolidated VIEs, which are classified as Level 2 or Level 3 within the fair value hierarchy.  Fair value is based on recent transaction prices for similar assets. 



F- 27



Long-term Debt - Structured Notes


Long-term debt includes variable rate and fixed to floating rate structured notes that contain various interest rate payment terms and are generally measured using valuation models for the derivative and debt portions of the notes. These models incorporate market price quotations from external pricing sources referencing the appropriate interest rate curves and are generally categorized within Level 2 of the fair value hierarchy. The impact of Jefferies credit spreads is also included based on observed secondary bond market spreads and asset-swap spreads.

The following is a summary of changes in fair value of our financial assets and liabilities that have been categorized within Level 3 of the fair value hierarchy for the year ended December 31, 2016 (in thousands):

Year Ended December 31, 2016

Balance, December 31, 2015

Total gains (losses)

(realized and unrealized) (1)

Purchases

Sales

Settlements

Issuances

Net transfers

into (out of)

Level 3

Balance at December 31, 2016

Changes in

unrealized gains (losses) relating to instruments still held at

December 31,

2016 (1)

Assets:

Trading assets:

Corporate equity securities

$

40,906


$

(8,463

)

$

3,365


$

(49

)

$

(671

)

$

-


$

(13,349

)

$

21,739


$

291


Corporate debt securities

25,876


(16,230

)

27,242


(29,347

)

(7,223

)

-


24,687


25,005


(18,799

)

CDOs and CLOs

85,092


(14,918

)

52,316


(69,394

)

(2,750

)

-


4,008


54,354


(7,628

)

Municipal securities

-


(1,462

)

-


-


-


-


28,719


27,257


(1,462

)

Sovereign obligations

120


5


-


(125

)

-


-


-


-


-


Residential mortgage-backed securities

70,263


(9,612

)

623


(12,249

)

(931

)

-


(9,322

)

38,772


(1,095

)

Commercial mortgage-backed securities

14,326


(7,550

)

3,132


(2,024

)

(2,229

)

-


14,925


20,580


(7,243

)

Other asset-backed securities

42,925


(14,381

)

133,986


(102,952

)

(8,769

)

-


(9,898

)

40,911


(18,056

)

Loans and other receivables

189,289


(42,566

)

75,264


(69,262

)

(46,851

)

-


(24,002

)

81,872


(52,003

)

Investments at fair value

199,794


54,538


29,728


(542

)

(1,107

)

-


31,948


314,359


54,608


Investment in FXCM (2)

625,689


(54,634

)

-


-


(406,555

)

-


-


164,500


(1,014

)

Liabilities:

Trading liabilities:










Corporate equity securities

$

38


$

-


$

-


$

313


$

(38

)

$

-


$

-


$

313


$

-


Corporate debt securities

-


(27

)

-


550


-


-


-


523


-


Net derivatives (3)

(242

)

(1,760

)

-


11,101


31


2,067


(7,756

)

3,441


(6,458

)

Loans

10,469


-


-


378


-


-


(10,469

)

378


-


Other secured financings

544


(126

)

-


-


-


-


-


418


(126

)


(1)

Realized and unrealized gains (losses) are reported in Principal transactions in the Consolidated Statements of Operations.

(2)

Includes $334.5 million related to the settlement of our participation rights for equity ownership in FXCM on September 1, 2016. We classify the equity ownership as a Loan to and investment in associated company at December 31, 2016 .

(3)

Net derivatives represent Trading assets - Derivatives and Trading liabilities - Derivatives.


Analysis of Level 3 Assets and Liabilities for the year ended December 31, 2016


During the year ended December 31, 2016 , transfers of assets of $179.6 million from Level 2 to Level 3 of the fair value hierarchy are attributed to:

CDOs and CLOs of $19.4 million , residential mortgage-backed securities of $17.5 million , commercial mortgage-backed securities of $17.4 million and other asset-backed securities of $16.9 million , for which no recent trade activity was observed for purposes of determining observable inputs;

Loans and other receivables of $13.8 million due to a lower number of contributors for certain vendor quotes supporting classification within Level 2;

Corporate debt securities of $28.1 million , investments at fair value of $31.9 million and municipal securities of $28.7 million due to a lack of observable market transactions.


During the year ended December 31, 2016 , transfers of assets of $133.2 million from Level 3 to Level 2 are attributed to:

Residential mortgage-backed securities of $26.8 million , other asset-backed securities of $26.8 million and CDOs and CLOs of $15.4 million , for which market trades were observed in the year for either identical or similar securities;


F- 28



Loans and other receivables of $37.8 million due to a greater number of contributors for certain vendor quotes supporting classification into Level 2;

Corporate equity securities of $19.2 million due to an increase in observable market transactions.


During the year ended December 31, 2016 , there were transfers of loan liabilities of $10.5 million from Level 3 to Level 2 due to an increase in observable inputs in the valuation.


Net losses on Level 3 assets were $115.3 million and net gains on Level 3 liabilities were $1.9 million for the year ended December 31, 2016 .  Net losses on Level 3 assets were primarily due to decreased valuations of our investment in FXCM, loans and other receivables, corporate debt securities, CDOs and CLOs, other asset-backed securities, residential and commercial mortgage-backed securities and corporate equity securities partially offset by increased valuations of certain investments at fair value.  Net gains on Level 3 liabilities were primarily due to increased valuations of certain net derivatives.

The following is a summary of changes in fair value of our financial assets and liabilities that have been categorized within Level 3 of the fair value hierarchy for the year ended December 31, 2015 (in thousands):

Year Ended December 31, 2015

Balance, December 31, 2014

Total gains (losses)

(realized and unrealized) (1)

Purchases

Sales

Settlements

Issuances

Net transfers

into (out of)

Level 3

Balance at

December

31 ,2015

Changes in

unrealized gains (losses) relating to instruments still held at

December

31, 2015 (1)

Assets:

Trading assets:

Corporate equity securities

$

20,964


$

11,154


$

21,385


$

(6,391

)

$

-


$

-


$

(6,206

)

$

40,906


$

11,424


Corporate debt securities

22,766


(11,013

)

21,534


(14,636

)

-


-


7,225


$

25,876


(9,443

)

CDOs and CLOS

124,650


(66,332

)

104,998


(107,381

)

(5,754

)

-


34,911


$

85,092


(48,514

)

Municipal securities

-


10


-


-


(21,551

)

-


21,541


-


-


Sovereign obligations

-


47


1,032


(1,031

)

-


-


72


120


39


Residential mortgage backed securities

82,557


(12,951

)

18,961


(31,762

)

(597

)

-


14,055


$

70,263


(4,498

)

Commercial mortgage-backed securities

26,655


(3,813

)

3,480


(10,146

)

(6,861

)

-


5,011


$

14,326


(3,205

)

Other asset-backed securities

2,294


(990

)

42,922


(1,299

)

(2

)

-


-


$

42,925


(254

)

Loans and other receivables

97,258


(14,755

)

792,345


(576,536

)

(124,365

)

-


15,342


$

189,289


(16,802

)

Investments at fair value

77,047


62,804


5,510


(425

)

(4,093

)

-


58,951


$

199,794


(1,964

)

Investment in FXCM

-


491,341


279,000


-


(144,652

)

-


-


625,689


491,341


Liabilities:










Trading liabilities:










Corporate equity securities

$

38


$

-


$

-


$

-


$

-


$

-


$

-


$

38


$

-


Corporate debt securities

223


(110

)

(6,804

)

6,691


-


-


-


$

-


-


Net derivatives (2)

(4,638

)

(7,310

)

(6,705

)

13,522


37


2,437


2,415


$

(242

)

4,754


Loans

14,450


(163

)

(2,059

)

229


-


-


(1,988

)

$

10,469


104


Other secured financings

30,825


-


-


-


(15,704

)

36,995


(51,572

)

$

544


-


(1)

Realized and unrealized gains (losses) are reported in Principal transactions in the Consolidated Statements of Operations.

(2)

Net derivatives represent Trading assets - Derivatives and Trading liabilities - Derivatives.

Analysis of Level 3 Assets and Liabilities for the year ended December 31, 2015

During the year ended December 31, 2015 , transfers of assets of $236.7 million from Level 2 to Level 3 of the fair value hierarchy are attributed to:

CDOs and CLOs of $69.8 million , non-agency residential mortgage-backed securities of $30.4 million and commercial mortgage-backed securities of $11.3 million for which no recent trade activity was observed for purposes of determining observable inputs;


F- 29



Municipal securities of $21.5 million and loans and other receivables of $20.1 million due to a lower number of contributors comprising vendor quotes to support classification within Level 2;

Corporate debt securities of $7.4 million and investments at fair value of $74.7 million due to a lack of observable market transactions.

During the year ended December 31, 2015 , transfers of assets of $85.8 million from Level 3 to Level 2 are attributed to:

Non-agency residential mortgage-backed securities of $16.3 million and commercial mortgage-backed securities of $6.3 million for which market trades were observed in the period for either identical or similar securities;

CDOs and CLOs of $34.9 million and loans and other receivables of $4.7 million due to a greater number of contributors for certain vendor quotes supporting classification into Level 2;

Investments at fair value of $15.8 million due to an increase in observable market transactions;

Corporate equity securities of $7.7 million due to an increase in observable market transactions.

During the year ended December 31, 2015 , there were transfers of other secured financings of $51.6 million from Level 3 to Level 2 due to an increase in observable inputs in the valuation.

Net gains on Level 3 assets were $455.5 million and net gains on Level 3 liabilities were $7.6 million for the year ended December 31, 2015 .  Net gains on Level 3 assets were primarily due to increased valuations of our investment in FXCM and increase in valuation of certain investments at fair value and corporate equity securities partially offset by decreased valuations of CDOs and CLOs, certain loans and other receivables and residential and commercial mortgage-backed securities.  Net gains on Level 3 liabilities were primarily due to increased valuations of certain net derivatives.

The following is a summary of changes in fair value of our financial assets and liabilities that have been categorized within Level 3 of the fair value hierarchy for the year ended December 31, 2014 (in thousands).

Year Ended December 31, 2014

Balance, December 31, 2013

Total gains (losses)

(realized and unrealized) (1)

Purchases

Sales

Settlements

Issuances

Net transfers

into (out of)

Level 3

Balance at December 31, 2014

Changes in

unrealized gains (losses) relating to instruments still held at

December 31, 2014 (1)

Assets:

Trading assets:

Corporate equity securities

$

9,884


$

957


$

18,138


$

(12,826

)

$

-


$

-


$

4,811


$

20,964


$

2,324


Corporate debt securities

25,666


6,629


38,316


(40,328

)

-


-


(7,517

)

22,766


8,982


CDOs and CLOs

37,216


(6,386

)

204,337


(181,757

)

(1,297

)

-


72,537


124,650


(1,141

)

U.S. government and federal agency securities

-


13


2,505


(2,518

)

-


-


-


-


-


Residential mortgage-backed securities

105,492


(9,870

)

42,632


(61,689

)

(1,847

)

-


7,839


82,557


(4,679

)

Commercial mortgage-backed securities

17,568


(4,237

)

49,159


(51,360

)

(782

)

-


16,307


26,655


(2,384

)

Other asset-backed securities

12,611


1,784


4,987


(18,002

)

-


-


914


2,294


1,484


Loans and other receivables

145,890


(31,311

)

130,169


(92,140

)

(60,390

)

-


5,040


97,258


(26,864

)

Investments at fair value

66,931


17,642


32,493


(23,324

)

(1,243

)

-


(15,452

)

77,047


1,985


Liabilities:









Trading liabilities:









Corporate equity securities

$

38


$

-


$

-


$

-


$

-


$

-


$

-


$

38


$

-


Corporate debt securities

-


(149

)

(565

)

960


-


-


(23

)

223


(8

)

Net derivatives (2)

6,905


15,055


(24,682

)

1,094


322


-


(3,332

)