Edgar Filing: PIPER JAFFRAY COMPANIES

e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the Quarterly Period Ended March 31, 2011


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

For the transition period from to

Commission File No. 001-31720

PIPER JAFFRAY COMPANIES

(Exact Name of Registrant as specified in its Charter)


DELAWARE (State or Other Jurisdiction of Incorporation or Organization)		30-0168701 (IRS Employer Identification No.)

800 Nicollet Mall, Suite 800 Minneapolis, Minnesota (Address of Principal Executive Offices)		55402 (Zip Code)

(612) 303-6000
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

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


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

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No þ

As of April 29, 2011, the registrant had 19,339,489 shares of Common Stock outstanding.

Piper Jaffray Companies

Index to Quarterly Report on Form 10-Q


PART I. FINANCIAL INFORMATION			2
Item 1. Financial Statements			3
Consolidated Statements of Financial Condition as of March 31, 2011 and December 31, 2010			3
Consolidated Statements of Operations for the three months ended March 31, 2011 and March 31, 2010			4
Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and March 31, 2010			5
Notes to the Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			29
Item 3. Quantitative and Qualitative Disclosures About Market Risk			50
Item 4. Controls and Procedures			50
PART II. OTHER INFORMATION			51
Item 1. Legal Proceedings			51
Item 1A. Risk Factors			51
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			51
Item 6. Exhibits			52
Signatures			53
Exhibit Index			54
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION


*ITEM 1.*		*FINANCIAL STATEMENTS*

Piper Jaffray Companies

Consolidated Statements of Financial Condition


	March 31,			December 31,
	2011			2010
(Amounts in thousands, except share data)	(Unaudited)
Assets

Cash and cash equivalents	$	43,263		$	50,602
Cash and cash equivalents segregated for regulatory purposes		7,006			27,006
Receivables:
Customers		60,712			42,955
Brokers, dealers and clearing organizations		174,775			188,798
Securities purchased under agreements to resell		231,738			258,997

Financial instruments and other inventory positions owned		368,986			358,344
Financial instruments and other inventory positions owned and pledged as collateral		493,692			515,806

Total financial instruments and other inventory positions owned		862,678			874,150

Fixed assets (net of accumulated depreciation and amortization of $58,031 and $57,777, respectively)		21,860			21,477
Goodwill		322,650			322,594
Intangible assets (net of accumulated amortization of $15,501 and $18,232, respectively)		57,511			59,580
Other receivables		54,697			54,098
Other assets		125,112			133,530


Total assets	$	1,962,002		$	2,033,787


Liabilities and Shareholders’ Equity

Short-term financing	$	125,213		$	193,589
Long-term financing		122,500			125,000
Payables:
Customers		65,005			51,814
Brokers, dealers and clearing organizations		37,162			18,519
Securities sold under agreements to repurchase		320,278			239,880
Financial instruments and other inventory positions sold, but not yet purchased		373,047			365,747
Accrued compensation		40,585			147,729
Other liabilities and accrued expenses		44,634			78,197

Total liabilities		1,128,424			1,220,475

Shareholders’ equity:
Common stock, $0.01 par value:
Shares authorized: 100,000,000 at March 31, 2011 and December 31, 2010; Shares issued: 19,509,813 at March 31, 2011 and December 31, 2010; Shares outstanding: 15,806,781 at March 31, 2011 and 14,652,665 at December 31, 2010		195			195
Additional paid-in capital		801,090			836,152
Retained earnings		186,788			179,555
Less common stock held in treasury, at cost: 3,703,032 shares at March 31, 2011 and 4,857,148 shares at December 31, 2010		(155,189	)		(203,317	)
Other comprehensive income		694			727


Total shareholders’ equity		833,578			813,312


Total liabilities and shareholders’ equity	$	1,962,002		$	2,033,787

See Notes to the Consolidated Financial Statements

Piper Jaffray Companies

Consolidated Statements of Operations

(Unaudited)


	Three Months Ended
	March 31,
(Amounts in thousands, except per share data)	2011		2010
Revenues:

Investment banking	$	47,041	$	43,748
Institutional brokerage		48,231		49,095
Asset management		17,929		9,154
Interest		14,229		13,449
Other income		5,511		2,927

Total revenues		132,941		118,373

Interest expense		8,161		8,787


Net revenues		124,780		109,586


Non-interest expenses:

Compensation and benefits		75,545		65,096
Occupancy and equipment		8,448		7,669
Communications		6,611		6,489
Floor brokerage and clearance		2,466		2,617
Marketing and business development		6,210		5,322
Outside services		8,106		8,004
Intangible asset amortization expense		2,069		976
Other operating expenses		3,977		4,258


Total non-interest expenses		113,432		100,431


Income before income tax expense		11,348		9,155

Income tax expense		4,115		8,645


Net income	$	7,233	$	510


Net income applicable to common shareholders	$	5,711	$	409


Earnings per common share
Basic	$	0.38	$	0.03
Diluted	$	0.38	$	0.03

Weighted average number of common shares outstanding
Basic		15,177		15,837
Diluted		15,224		15,924

See Notes to the Consolidated Financial Statements

Piper Jaffray Companies

Consolidated Statements of Cash Flows

(Unaudited)


	Three Months Ended March 31,
(Dollars in thousands)	2011			2010
Operating Activities:

Net income	$	7,233		$	510
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Depreciation and amortization of fixed assets		1,782			1,847
Deferred income taxes		15,161			16,133
Stock-based compensation		9,142			6,997
Amortization of intangible assets		2,069			976
Amortization of forgivable loans		2,076			1,315
Decrease/(increase) in operating assets:
Cash and cash equivalents segregated for regulatory purposes		20,000			1,000
Receivables:
Customers		(17,760	)		23,569
Brokers, dealers and clearing organizations		14,023			49,741
Securities purchased under agreements to resell		27,259			(216,602	)
Net financial instruments and other inventory positions owned		18,772			12,519
Other receivables		(2,630	)		418
Other assets		(6,637	)		(2,417	)
Increase/(decrease) in operating liabilities:
Payables:
Customers		13,185			(7,681	)
Brokers, dealers and clearing organizations		18,643			(8,976	)
Securities sold under agreements to repurchase		22,149			(200	)
Accrued compensation		(85,200	)		(91,616	)
Other liabilities and accrued expenses		(33,682	)		(14,794	)


Net cash provided by/(used in) operating activities		25,585			(227,261	)

Investing Activities:

Business acquisitions, net of cash acquired		(56	)		(181,906	)
Purchases of fixed assets, net		(2,147	)		(952	)


Net cash used in investing activities		(2,203	)		(182,858	)


Financing Activities:

Increase/(decrease) in short-term financing		(68,376	)		3,441
Decrease in long-term financing		(2,500	)		-
Decrease in securities loaned		-			(3,652	)
Increase in securities sold under agreements to repurchase		58,249			415,651
Repurchase of common stock		(18,623	)		(8,316	)
Excess tax benefits from stock-based compensation		533			-
Proceeds from stock option transactions		31			98


Net cash provided by/(used in) financing activities		(30,686	)		407,222


Currency adjustment:
Effect of exchange rate changes on cash		(35	)		(562	)


Net decrease in cash and cash equivalents		(7,339	)		(3,459	)

Cash and cash equivalents at beginning of period		50,602			43,942


Cash and cash equivalents at end of period	$	43,263		$	40,483


Supplemental disclosure of cash flow information -
Cash paid during the period for:
Interest	$	9,796		$	6,089
Income taxes	$	18,628		$	257

Non-cash investing activities -
Issuance of restricted common stock for acquisition of Advisory Research, Inc.:
893,105 shares for the three months ended March 31, 2010	$	-		$	31,822

Non-cash financing activities -
Issuance of common stock for retirement plan obligations:
90,085 shares and 81,696 shares for the three months ended March 31, 2011 and 2010, respectively	$	3,814		$	3,634

Issuance of restricted common stock for annual equity award:
592,697 shares and 699,673 shares for the three months ended March 31, 2011 and 2010, respectively	$	25,095		$	31,121

See Notes to the Consolidated Financial Statements

Piper Jaffray Companies

Notes to the Consolidated Financial Statements


Note 1		Background

Piper Jaffray Companies is the parent company of Piper Jaffray & Co. (“Piper Jaffray”), a securities broker dealer and investment banking firm; Piper Jaffray Asia Holdings Limited, an entity providing investment banking services in China headquartered in Hong Kong; Piper Jaffray Ltd., a firm providing securities brokerage and mergers and acquisitions services in Europe headquartered in London, England; Advisory Research, Inc. (“ARI”) and Fiduciary Asset Management, Inc. (“FAMCO”), entities providing asset management services to separately managed accounts, closed end funds and partnerships; Piper Jaffray Financial Products Inc., Piper Jaffray Financial Products II Inc. and Piper Jaffray Financial Products III Inc., entities that facilitate derivative transactions; and other immaterial subsidiaries. Piper Jaffray Companies and its subsidiaries (collectively, the “Company”) operate in two reporting segments: Capital Markets and Asset Management. A summary of the activities of each of the Company’s business segments is as follows:

Capital Markets

The Capital Markets segment provides institutional sales, trading and research services and investment banking services. Institutional sales, trading and research services focus on the trading of equity and fixed income products with institutions, government, and non-profit entities. Revenues are generated through commissions and sales credits earned on equity and fixed income institutional sales activities, net interest revenues on trading securities held in inventory, profits and losses from trading these securities and strategic trading opportunities. Investment banking services include management of and participation in underwritings, merger and acquisition services and public finance activities. Revenues are generated through the receipt of advisory and financing fees.

Asset Management

The Asset Management segment provides asset management services and product offerings in equity and fixed income securities to institutional and high net worth individuals through proprietary distribution channels. Revenues are generated in the form of management fees and performance fees. The majority of the Company’s performance fees, if earned, are recognized in the fourth quarter.

Basis of Presentation

The consolidated financial statements include the accounts of Piper Jaffray Companies, its wholly owned subsidiaries and other entities in which the Company has a controlling financial interest. All material intercompany balances have been eliminated. Certain financial information for prior periods has been reclassified to conform to the current period presentation.

The consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) with respect to Form 10-Q and reflect all adjustments that in the opinion of management are normal and recurring and that are necessary for a fair statement of the results for the interim periods presented. In accordance with these rules and regulations, certain disclosures that are normally included in annual financial statements have been omitted. The consolidated financial statements included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

The consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles. These principles require management to make certain estimates and assumptions that may affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The nature of the Company’s business is such that the results of any interim period may not be indicative of the results to be expected for a full year.


Note 2		Summary of Significant Accounting Policies

Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, for a full description of the Company’s significant accounting policies.


Note 3		Recent Accounting Pronouncements

Adoption of New Accounting Standards

Fair Value Measurements

In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, “Improving Disclosures about Fair Value Measurements,” (“ASU 2010-06”) amending FASB Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”). The amended guidance requires entities to disclose additional information regarding assets and liabilities that are transferred between levels of the fair value hierarchy and to disclose information in the Level III rollforward about purchases, sales, issuances and settlements on a gross basis. ASU 2010-06 also further clarifies existing guidance pertaining to the level of disaggregation at which fair value disclosures should be made and the requirements to disclose information about the valuation techniques and inputs used in estimating Level II and Level III fair value measurements. The guidance in ASU 2010-06 was effective for the Company January 1, 2010, except for the requirement to separately disclose purchases, sales, issuances and settlements on a gross basis in the Level III rollforward, which was effective January 1, 2011. While the adoption of ASU 2010-06 did not change accounting requirements, it did impact the Company’s disclosures about fair value measurements.


Note 4		Acquisition of Advisory Research, Inc.

On March 1, 2010, the Company completed the purchase of ARI, an asset management firm based in Chicago, Illinois. The purchase was completed pursuant to the securities purchase agreement dated December 20, 2009. The fair value as of the acquisition date was $212.1 million, consisting of $180.3 million in cash and 893,105 shares (881,846 of which vest in four equal annual installments) of the Company’s common stock valued at $31.8 million. The fair value of the 881,846 shares of common stock with vesting restrictions was determined using the market price of the Company’s common stock on the date of the acquisition discounted for the liquidity restrictions in accordance with the valuation principles of ASC 820. The vesting provisions of these 881,846 shares (of which 220,466 shares vested on March 1, 2011) are principally time-based, but also include certain post-termination restrictions. The remaining 11,259 shares have no vesting restrictions and the fair value was determined using the market price of the Company’s common stock on the date of the acquisition. A portion of the purchase price payable in cash was funded by proceeds from the issuance of variable rate senior notes (“Notes”) in the amount of $120 million pursuant to the note purchase agreement (“Note Purchase Agreement”) dated December 31, 2009 with certain entities advised by Pacific Investment Management Company LLC (“PIMCO”) and discussed further in Note 14 to these consolidated financial statements.

The acquisition was accounted for under the acquisition method of accounting in accordance with FASB Accounting Standards Codification Topic 805, “Business Combinations.” Accordingly, goodwill was measured as the excess of the acquisition-date fair value of the consideration transferred over the amount of acquisition-date identifiable assets acquired net of assumed liabilities. The Company recorded $152.3 million of goodwill as an asset on the consolidated statements of financial condition, which is deductible for income tax purposes. In management’s opinion, the goodwill represents the reputation and expertise of ARI in the asset management business.

Identifiable intangible assets purchased by the Company consisted of customer relationships and the ARI trade name with acquisition-date fair values of $52.2 million and $2.9 million, respectively. Acquisition costs of $44,000 were incurred in the three months ended March 31, 2010, and are included in outside services on the consolidated statements of operations.

The following table summarizes the fair value of assets acquired and liabilities assumed at the date of the acquisition:


(Dollars in thousands)
Assets:
Cash and cash equivalents	$	2,008
Other receivables		8,861
Fixed assets		377
Goodwill		152,282
Intangible assets		55,059
Other assets		369

Total assets acquired		218,956

Liabilities:
Accrued compensation		149
Other liabilities and accrued expenses		6,726

Total liabilities assumed		6,875


Net assets acquired	$	212,081

ARI’s results of operations have been included in the consolidated Company’s financial statements prospectively beginning on the date of acquisition.

The following unaudited pro forma financial data assumes the acquisition had occurred on January 1, 2010, the beginning of the period in which the acquisition occurred. Pro forma results have been prepared by adjusting the consolidated Company’s historical results to include ARI’s results of operations adjusted for the following changes: depreciation and amortization expenses were adjusted as a result of acquisition-date fair value adjustments to fixed assets, intangible assets, deferred acquisition costs and lease obligations; interest expense was adjusted for revised debt structures; and the income tax effect of applying the Company’s statutory tax rates to ARI’s results. The consolidated Company’s unaudited pro forma information presented does not necessarily reflect the results of operations that would have resulted had the acquisition been completed at the beginning of the applicable period presented, nor does it indicate the results of operations in future periods.


	Three Months Ended
	March 31,
(Dollars in thousands)	2010
Net revenues	$	117,631
Net income	$	2,257


Note 5		Financial Instruments and Other Inventory Positions Owned and Financial Instruments and Other Inventory Positions Sold, but Not Yet Purchased

Financial instruments and other inventory positions owned and financial instruments and other inventory positions sold, but not yet purchased were as follows:


	March 31,		December 31,
(Dollars in thousands)	2011		2010
Financial instruments and other inventory positions owned:
Corporate securities:
Equity securities	$	36,765	$	18,089
Convertible securities		39,541		37,290
Fixed income securities		72,700		58,591
Municipal securities:
Taxable securities		253,135		295,439
Tax-exempt securities		131,918		137,340
Short-term securities		78,516		48,830
Asset-backed securities		80,141		88,922
U.S. government agency securities		129,465		153,739
U.S. government securities		18,128		6,569
Derivative contracts		22,369		29,341

	$	862,678	$	874,150


Financial instruments and other inventory positions sold, but not yet purchased:
Corporate securities:
Equity securities	$	29,863	$	23,651
Convertible securities		6,306		8,320
Fixed income securities		22,268		17,965
Asset-backed securities		21,032		12,425
U.S. government agency securities		83,121		52,934
U.S. government securities		206,561		250,452
Derivative contracts		3,896		-

	$	373,047	$	365,747

At March 31, 2011 and December 31, 2010, financial instruments and other inventory positions owned in the amount of $493.7 million and $515.8 million, respectively, had been pledged as collateral for the Company’s repurchase agreements and short-term financings.

Inventory positions sold, but not yet purchased represent obligations of the Company to deliver the specified security at the contracted price, thereby creating a liability to purchase the security in the market at prevailing prices. The Company is obligated to acquire the securities sold short at prevailing market prices, which may exceed the amount reflected on the consolidated statements of financial condition. The Company economically hedges changes in market value of its financial instruments and other inventory positions owned utilizing inventory positions sold, but not yet purchased, interest rate derivatives, credit default swap index contracts, futures and exchange-traded options.

Derivative Contract Financial Instruments

The Company uses interest rate swaps, interest rate locks, credit default swap index contracts and foreign currency forward contracts to facilitate customer transactions and as a means to manage risk in certain inventory positions and firm investments. The following describes the Company’s derivatives by the type of transaction or security the instruments are economically hedging.

Customer matched-book derivatives: The Company enters into interest rate derivative contracts in a principal capacity as a dealer to satisfy the financial needs of its customers. The Company simultaneously enters into an interest rate derivative contract with a third party for the same notional amount to hedge the interest rate and credit risk of the initial client interest rate derivative contract. In certain limited instances, the Company has only hedged interest rate risk with a third party, and retains uncollateralized credit risk as described below. The instruments use interest rates based upon either the London Interbank Offer Rate (“LIBOR”) index or the Securities Industry and Financial Markets Association (“SIFMA”) index.

Trading securities derivatives: The Company entered into interest rate derivative contracts to hedge interest rate and market value risks associated with its fixed income securities. The instruments use interest rates based upon either the Municipal Market Data (“MMD”) index, LIBOR or the SIFMA index. The Company also enters into credit default swap index contracts to hedge credit risk associated with its taxable fixed income securities.

Firm investments: The Company enters into foreign currency forward contracts to manage the currency exposure related to its non-U.S. dollar denominated firm investments.

The following table presents the total absolute notional contract amount associated with the Company’s outstanding derivative instruments:


(Dollars in thousands)		March 31,		December 31,

Transaction Type or Hedged Security	Derivative Category	2011		2010
Customer matched-book	Interest rate derivative contract	$	6,481,336	$	6,505,232
Trading securities	Interest rate derivative contract		202,250		192,250
Trading securities	Credit default swap index contract		200,000		200,000
Firm investments	Foreign currency forward contract		-		16,645

		$	6,883,586	$	6,914,127

The Company’s interest rate derivative contracts, credit default swap index contracts and foreign currency forward contracts do not qualify for hedge accounting, therefore, unrealized gains and losses are recorded on the consolidated statements of operations. The following table presents the Company’s unrealized gains/(losses) on derivative instruments:


(Dollars in thousands)		Three Months Ended March 31,

Derivative Category	Operations Category	2011			2010
Interest rate derivative contract	Investment banking	$	(547	)	$	(1,167	)
Interest rate derivative contract	Institutional brokerage		(1,246	)		126
Credit default swap index contract	Institutional brokerage		(105	)		-
Foreign currency forward contract	Other operating expenses		59			57

		$	(1,839	)	$	(984	)

The gross fair market value of all derivative instruments and their location on the Company’s consolidated statements of financial condition prior to counterparty netting are shown below by asset or liability position (1):


(Dollars in thousands)		Asset Value at			Liability Value at

Derivative Category	Financial Condition Location	March 31, 2011		Financial Condition Location	March 31, 2011
Interest rate derivative contract	Financial intruments and other inventory positions owned	$	334,809	Financial intruments and other inventory positions sold, but not yet purchased	$	294,722
Credit default swap index contract	Financial intruments and other inventory positions owned		2,336	Financial intruments and other inventory positions sold, but not yet purchased		3,226

		$	337,145		$	297,948


(1)		Amounts are disclosed at gross fair value in accordance with the requirement of FASB Accounting Standards Codification Topic 815, “Derivatives and Hedging”(“ASC 815”).

Derivatives are reported on a net basis by counterparty when legal right of offset exists and when applicable provisions are stated in master netting agreements. Cash collateral received or paid is netted on a counterparty basis, provided a legal right of offset exists.

Credit risk associated with the Company’s derivatives is the risk that a derivative counterparty will not perform in accordance with the terms of the applicable derivative contract. Credit exposure associated with the Company’s derivatives is driven by uncollateralized market movements in the fair value of the contracts with counterparties and

is monitored regularly by the Company’s financial risk committee. The Company considers counterparty credit risk in determining derivative contract fair value. The majority of the Company’s derivative contracts are substantially collateralized by its counterparties, who are major financial institutions. The Company has a limited number of counterparties who are not required to post collateral. Based on market movements, the uncollateralized amounts representing the fair value of the derivative contract can become material, exposing the Company to the credit risk of these counterparties. As of March 31, 2011, the Company had $17.3 million of uncollateralized credit exposure with these counterparties (notional contract amount of $267.5 million), including $9.8 million of uncollateralized credit exposure with one counterparty.


Note 6		Fair Value of Financial Instruments

The Company records financial instruments and other inventory positions owned and financial instruments and other inventory positions sold, but not yet purchased at fair value on the consolidated statements of financial condition with unrealized gains and losses reflected on the consolidated statements of operations.

The degree of judgment used in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and other characteristics specific to the instrument. Financial instruments with readily available active quoted prices for which fair value can be measured generally will have a higher degree of pricing observability and a lesser degree of judgment used in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have less, or no, pricing observability and a higher degree of judgment used in measuring fair value.

The following is a description of the valuation techniques used to measure fair value.

Cash Equivalents

Cash equivalents include highly liquid investments with original maturities of 90 days or less. Actively traded money market funds are measured at their net asset value and classified as Level I.

Financial Instruments and Other Inventory Positions Owned

Equity securities — Exchange traded equity securities are valued based on quoted prices from the exchange for identical assets or liabilities as of the period-end date. To the extent these securities are actively traded and valuation adjustments are not applied, they are categorized as Level I. Non-exchange traded equity securities (principally hybrid preferred securities) are measured primarily using broker quotations, pricing service data from external providers and prices observed for recently executed market transactions and are categorized within Level II of the fair value hierarchy. Where such information is not available, non-exchange traded equity securities are categorized as Level III financial instruments and measured using valuation techniques involving quoted prices of or market data for comparable companies. 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 and geographical concentration).

Convertible securities — Convertible securities are valued based on observable trades, when available. Accordingly, these convertible securities are categorized as Level II. When observable price quotations are not available, fair value is determined based upon model-based valuation techniques with observable market inputs, such as specific company stock price and volatility and unobservable inputs such as option adjusted spreads. These instruments are categorized as Level III.

Corporate fixed income securities — Fixed income securities include corporate bonds which are valued based on recently executed market transactions of comparable size, pricing service data from external providers when available, or broker quotations. Accordingly, these corporate bonds are categorized as Level II. When observable price quotations are not available, fair value is determined using model-based valuation techniques with observable inputs such as specific security contractual terms and yield curves and unobservable inputs such as credit spreads. Corporate bonds measured using model-based valuation techniques are categorized as Level III.

Taxable municipal securities — Taxable municipal securities are valued using recently executed observable trades or market price quotations and therefore are generally categorized as Level II.

Tax-exempt municipal securities — Tax-exempt municipal securities are valued using recently executed observable trades or market price quotations and therefore are generally categorized as Level II. Certain illiquid tax-exempt municipal securities are valued using market data for comparable securities (maturity and sector) and management judgment to infer an appropriate current yield and are categorized as Level III.

Short-term municipal securities — Short-term municipal securities include auction rate securities, variable rate demand notes, and other short-term municipal securities. Variable rate demand notes and other short-term municipal securities are valued using recently executed observable trades or market price quotations and therefore are generally categorized as Level II. Auction rate securities are categorized as Level III.

Asset-backed securities — Asset-backed securities are valued using observable trades, when available. Certain asset-backed securities are valued using models where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data. These asset-backed securities are categorized as Level II. Other asset-backed securities, which are principally collateralized by residential mortgages or aircraft, have experienced low volumes of executed transactions that results in less observable transaction data. Asset-backed securities collateralized by residential mortgages are valued using cash flow models that utilize unobservable inputs including credit default rates ranging from 1-10%, prepayment rates ranging from 3-20% of CPR, severity ranging from 40-80% and valuation yields ranging from 4-9%. Asset-backed securities collateralized by aircraft are valued using cash flow models that utilize unobservable inputs including airplane lease rates, aircraft valuation, trust costs, and other factors impacting security cash flows. The Company’s aircraft asset-backed securities had a weighted average yield of 11.5% at March 31, 2011. As judgment is used to determine the range of these inputs, these asset-backed securities are categorized as Level III.

U.S. government agency securities — U.S. government agency securities include agency debt bonds and mortgage bonds. Agency debt bonds are valued by using either direct price quotes or price quotes for comparable bond securities and thus, are categorized as Level II. Mortgage bonds include mortgage bonds, mortgage pass-through securities and agency collateralized mortgage-obligations (“CMO”). Mortgage pass-through securities and CMO securities are valued using recently executed observable trades or other observable inputs, such as prepayment speeds and therefore, generally are categorized as Level II. Mortgage bonds are valued using observable market inputs, such as market yields ranging from 80-120 basis point spreads to treasury securities, or models based upon prepayment expectations ranging from 200-350 Public Securities Association (“PSA”) prepayment levels. These securities are categorized as Level II.

U.S. government securities — U.S. government securities include highly liquid U.S. treasury securities which are generally valued using quoted market prices and therefore categorized as Level I.

Derivatives — Derivative contracts include interest rate, forward purchase agreement and basis swaps, interest rate locks, futures, credit default swap index contracts and foreign currency forward contracts. These instruments derive their value from underlying assets, reference rates, indices or a combination of these factors. The majority of the Company’s interest rate derivative contracts, including both interest rate swaps and interest rate locks, are valued using market standard pricing models based on the net present value of estimated future cash flows. The valuation models used do not involve material subjectivity as the methodologies do not entail significant judgment and the pricing inputs are market observable, including contractual terms, yield curves and measures of volatility. These instruments are classified as Level II within the fair value hierarchy. Certain interest rate locks transact in less active markets and were valued using valuation models that used the previously mentioned observable inputs and unobservable inputs that required significant judgment. These instruments are classified as Level III. The Company’s credit default swap index contracts and foreign currency forward contracts are valued using market price quotations and classified as Level II.

Investments

The Company’s investments valued at fair value include investments in public companies, warrants of public or private companies and investments in certain illiquid municipal bonds. These investments are included in other

assets on the consolidated statements of financial condition. Exchange traded direct equity investments in public companies are valued based on quoted prices on active markets and reported in Level I. Company-owned warrants, which have a cashless exercise option, are valued based upon the Black-Scholes option-pricing model that uses discount rates and stock volatility factors of comparable companies as inputs. These inputs are subject to management judgment to account for differences between the measured investment and comparable companies. Company-owned warrants are reported as Level III assets. Investments in certain illiquid municipal bonds that the Company is holding for investment are measured using valuation techniques involving significant management judgment and are reported as Level III assets.

Fair Value Option — The fair value option permits the irrevocable fair value option election on an instrument-by-instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. The fair value option was elected for certain merchant banking investments at inception to reflect economic events in earnings on a timely basis. At March 31, 2011, $8.6 million in merchant banking investments, included within other assets on the consolidated statements of financial condition, are accounted for at fair value and are classified as Level III assets. The gains and losses as a result of electing to apply the fair value option to certain financial assets was not material for the three months ended March 31, 2011.

The following table summarizes the valuation of our financial instruments by pricing observability levels defined in ASC 820 as of March 31, 2011:


							Counterparty
							Collateral
(Dollars in thousands)	Level I		Level II		Level III		Netting (1)			Total
Assets:
Financial instruments and other inventory positions owned:
Corporate securities:
Equity securities	$	11,670	$	23,730	$	1,365	$	-		$	36,765
Convertible securities		-		34,468		5,073		-			39,541
Fixed income securities		-		72,604		96		-			72,700
Municipal securities:
Taxable securities		-		253,135		-		-			253,135
Tax-exempt securities		-		128,211		3,707		-			131,918
Short-term securities		-		78,341		175		-			78,516
Asset-backed securities		-		29,079		51,062		-			80,141
U.S. government agency securities		-		129,465		-		-			129,465
U.S. government securities		18,128		-		-		-			18,128
Derivative contracts		-		52,090		4,113		(33,834	)		22,369

Total financial instruments and other inventory positions owned:		29,798		801,123		65,591		(33,834	)		862,678

Cash equivalents		15,021		-		-		-			15,021

Investments		4,133		-		17,900		-			22,033

Total assets	$	48,952	$	801,123	$	83,491	$	(33,834	)	$	899,732


Liabilities:
Financial instruments and other inventory positions sold, but not yet purchased:
Corporate securities:
Equity securities	$	29,863	$	-	$	-	$	-		$	29,863
Convertible securities		-		4,393		1,913		-			6,306
Fixed income securities		-		22,108		160		-			22,268
Asset-backed securities		-		17,813		3,219		-			21,032
U.S. government agency securities		-		83,121		-		-			83,121
U.S. government securities		206,561		-		-		-			206,561
Derivative contracts		-		16,139		867		(13,110	)		3,896

Total financial instruments and other inventory positions sold, but not yet purchased:		236,424		143,574		6,159		(13,110	)		373,047

Investments		-		-		1,610		-			1,610

Total liabilities	$	236,424	$	143,574	$	7,769	$	(13,110	)	$	374,657


(1)		Represents cash collateral and the impact of netting on a counterparty basis. The Company had no securities posted as collateral to its counterparties.

The following table summarizes the valuation of our financial instruments by pricing observability levels defined in ASC 820 as of December 31, 2010:


							Counterparty
							Collateral
(Dollars in thousands)	Level I		Level II		Level III		Netting (1)			Total
Assets:
Financial instruments and other inventory positions owned:
Corporate securities:
Equity securities	$	14,509	$	2,240	$	1,340	$	-		$	18,089
Convertible securities		-		34,405		2,885		-			37,290
Fixed income securities		-		52,323		6,268		-			58,591
Municipal securities:
Taxable securities		-		295,439		-		-			295,439
Tax-exempt securities		-		131,222		6,118		-			137,340
Short-term securities		-		48,705		125		-			48,830
Asset-backed securities		-		43,752		45,170		-			88,922
U.S. government agency securities		-		153,739		-		-			153,739
U.S. government securities		6,569		-		-		-			6,569
Derivative contracts		-		58,047		4,665		(33,371	)		29,341

Total financial instruments and other inventory positions owned:		21,078		819,872		66,571		(33,371	)		874,150

Cash equivalents		9,923		-		-		-			9,923

Investments		4,961		-		9,682		-			14,643

Total assets	$	35,962	$	819,872	$	76,253	$	(33,371	)	$	898,716


Liabilities:
Financial instruments and other inventory positions sold, but not yet purchased:
Corporate securities:
Equity securities	$	23,651	$	-	$	-	$	-		$	23,651
Convertible securities		-		6,543		1,777		-			8,320
Fixed income securities		-		15,642		2,323		-			17,965
Asset-backed securities		-		10,310		2,115		-			12,425
U.S. government agency securities		-		52,934		-		-			52,934
U.S. government securities		250,452		-		-		-			250,452
Derivative contracts		-		21,084		339		(21,423	)		-

Total financial instruments and other inventory positions sold, but not yet purchased:		274,103		106,513		6,554		(21,423	)		365,747

Investments		-		-		1		-			1

Total liabilities	$	274,103	$	106,513	$	6,555	$	(21,423	)	$	365,748


(1)		Represents cash collateral and the impact of netting on a counterparty basis. The Company had no securities posted as collateral to its counterparties.

The Company’s Level III assets were $83.5 million and $76.3 million, or 9.3 percent and 8.5 percent of financial instruments measured at fair value at March 31, 2011 and December 31, 2010, respectively. Transfers between levels are recognized at the beginning of the reporting period. There were $10.7 million of transfers of financial assets from Level II to Level III during the three months ended March 31, 2011 related to tax-exempt securities, convertible securities and asset-backed securities for which no recent trade activity was observed and valuation inputs became unobservable. There were $0.3 million of transfers of financial liabilities from Level II to Level III during the three months ended March 31, 2011. There were $2.9 million of transfers of financial assets and $1.8 million of transfers of financial liabilities from Level III to Level II during the three months ended March 31, 2011 related to convertible securities for which market trades were observed that provided transparency into the valuation of these assets. Transfers between Level I and Level II were not material for the three months ended March 31, 2011 and 2010, respectively.

As discussed in Note 3, the Company began disclosing information in the Level III rollforward on a gross basis for purchases, sales, issuances and settlements effective January 1, 2011. The following tables summarize the changes in fair value associated with Level III financial instruments during the three months ended March 31, 2011 and 2010:


	Balance at																			Balance at
	December 31,													Realized gains/			Unrealized gains/			March 31,
(Dollars in thousands)	2010		Purchases			Sales			Transfers in		Transfers out			(losses) (1)			(losses) (1)			2011
Assets:
Financial instruments and other inventory positions owned:
Corporate securities:
Equity securities	$	1,340	$	-		$	-		$	-	$	-		$	-		$	25		$	1,365
Convertible securities		2,885		80,238			(78,401	)		6,122		(2,885	)		(1,877	)		(1,009	)		5,073
Fixed income securities		6,268		26,389			(32,728	)		-		-			147			20			96
Municipal securities:
Tax-exempt securities		6,118		-			(6,106	)		3,791		-			(3	)		(93	)		3,707
Short-term securities		125		50			-			-		-			-			-			175
Asset-backed securities		45,170		83,840			(77,598	)		754		-			(1,139	)		35			51,062
Derivative contracts		4,665		-			-			-		-			-			(552	)		4,113

Total financial instruments and other inventory positions owned:		66,571		190,517			(194,833	)		10,667		(2,885	)		(2,872	)		(1,574	)		65,591

Investments		9,682		8,555			(641	)		-		-			641			(337	)		17,900

Total assets	$	76,253	$	199,072		$	(195,474	)	$	10,667	$	(2,885	)	$	(2,231	)	$	(1,911	)	$	83,491


Liabilities:
Financial instruments and other inventory positions sold, but not yet purchased:
Corporate securities:
Convertible securities	$	1,777	$	-		$	1,909		$	-	$	(1,777	)	$	-		$	4		$	1,913
Fixed income securities		2,323		(2,903	)		710			-		-			(27	)		57			160
Asset-backed securities		2,115		(5,620	)		6,539			322		-			17			(154	)		3,219
Derivative contracts		339		-			-			-		-			-			528			867

Total financial instruments and other inventory positions sold, but not yet purchased:		6,554		(8,523	)		9,158			322		(1,777	)		(10	)		435			6,159

Investments		1		1,609			(65	)		-		-			65			-			1,610

Total liabilities	$	6,555	$	(6,914	)	$	9,093		$	322	$	(1,777	)	$	55		$	435		$	7,769


	Balance at												Balance at
	December 31,		Purchases/			Net transfers		Realized gains/		Unrealized gains/			March 31,
(Dollars in thousands)	2009		(sales), net			in/(out)		(losses) (1)		(losses) (1)			2010
Assets:
Financial instruments and other inventory positions owned:
Corporate securities:
Convertible securities	$	-	$	7,590		$	4,292	$	1,836	$	967		$	14,685
Fixed income securities		-		1,937			-		211		(2	)		2,146
Municipal securities:
Short-term securities		17,825		-			-		-		(1	)		17,824
Asset-backed securities		24,239		(7,924	)		8,796		1,688		493			27,292
U.S. government agency securities		-		-			8,279		-		767			9,046

Total financial instruments and other inventory positions owned:		42,064		1,603			21,367		3,735		2,224			70,993

Investments		2,240		-			-		-		802			3,042

Total assets	$	44,304	$	1,603		$	21,367	$	3,735	$	3,026		$	74,035


Liabilities:
Financial instruments and other inventory positions sold, but not yet purchased:
Corporate securities:
Fixed income securities	$	7,771	$	(2,310	)	$	-	$	46	$	109		$	5,616
Asset-backed securities		2,154		1,586			507		18		114			4,379

Total financial instruments and other inventory positions sold, but not yet purchased:		9,925		(724	)		507		64		223			9,995

Investments		19		-			-		-		-			19


Total liabilities	$	9,944	$	(724	)	$	507	$	64	$	223		$	10,014


(1)		Realized and unrealized gains/(losses) related to financial instruments, with the exception of foreign currency forward contracts and customer matched-book derivatives, are reported in institutional brokerage on the consolidated statements of operations. Realized and unrealized gains/(losses) related to foreign currency forward contracts are recorded in other operating expenses. Realized and unrealized gains/(losses) related to customer matched-book derivatives are reported in investment banking. Realized and unrealized gains/(losses) related to investments are reported in investment banking revenues or other income/(loss) on the consolidated statements of operations.

Some of the Company’s financial instruments are not measured at fair value on a recurring basis, but are recorded at amounts that approximate fair value due to their liquid or short-term nature. Such financial assets and financial liabilities include cash, securities either purchased or sold under agreements to resell, receivables and payables either from or to customers and brokers, dealers and clearing organizations and short-term financings.


Note 7		Variable Interest Entities

In the normal course of business, the Company periodically creates or transacts with entities that are investment vehicles organized as limited partnerships or limited liability companies. These entities were established for the purpose of investing in equity and debt securities of public and private companies and were initially financed through the capital commitments of the members. The Company has investments in and/or acts as the managing partner of these entities. In certain instances, the Company provides management and investment advisory services for which it earns fees generally based upon the market value of assets under management and may include incentive fees based upon performance. At March 31, 2011, the Company’s aggregate net investment in these investment vehicles totaled $22.5 million and is recorded in other assets on the consolidated statements of financial condition. The Company’s remaining capital commitments to these entities was $2.5 million at March 31, 2011.

Variable interest entities (“VIEs”) are entities in which equity investors lack the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities. The determination as to whether an entity is a VIE is based on the amount and nature of the members’ equity investment in the entity. The Company also considers other characteristics such as the power through voting rights or similar rights to direct the activities of an entity that most significantly impact the entity’s economic performance. For those entities that meet the deferral provisions defined by FASB ASU No. 2010-10, “Consolidation: Amendments for Certain Investment Funds,” (“ASU 2010-10”), the Company considers characteristics such as the ability to influence the decision making about the entity’s activities and how the entity is financed. The Company has identified certain of the entities described above as VIEs. These VIEs had net assets approximating $1.2 billion at March 31, 2011. The Company’s exposure to loss from these VIEs is $8.0 million, which is the carrying value of its capital contributions recorded in other assets on the consolidated statements of financial condition at March 31, 2011. The Company had no liabilities related to these VIEs at March 31, 2011.

The Company is required to consolidate all VIEs for which it is considered to be the primary beneficiary. The determination as to whether the Company is considered to be the primary beneficiary is based on whether the Company has both the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. For those entities that meet the deferral provisions defined by ASU 2010-10, the determination as to whether the Company is considered to be the primary beneficiary is based on whether the Company will absorb a majority of the VIE’s expected losses, receive a majority of the VIE’s expected residual returns, or both. It was determined the Company is not the primary beneficiary of the VIEs and accordingly does not consolidate them.

The Company has not provided financial or other support to the VIEs that it was not previously contractually required to provide as of March 31, 2011.


Note 8		Receivables from and Payables to Brokers, Dealers and Clearing Organizations

Amounts receivable from brokers, dealers and clearing organizations at March 31, 2011 and December 31, 2010 included:


	March 31,		December 31,
(Dollars in thousands)	2011		2010
Receivable arising from unsettled securities transactions, net	$	44,984	$	65,923
Deposits paid for securities borrowed		74,677		62,720
Receivable from clearing organizations		14,439		19,168
Deposits with clearing organizations		26,466		24,795
Securities failed to deliver		4,952		1,361
Other		9,257		14,831

	$	174,775	$	188,798

Amounts payable to brokers, dealers and clearing organizations at March 31, 2011 and December 31, 2010 included:


	March 31,		December 31,
(Dollars in thousands)	2011		2010
Payable to clearing organizations	$	14,297	$	2,320
Securities failed to receive		3,488		499
Other		19,377		15,700

	$	37,162	$	18,519

Deposits paid for securities borrowed approximate the market value of the securities. Securities failed to deliver and receive represent the contract value of securities that have not been delivered or received by the Company on settlement date.

Note 9 Collateralized Securities Transactions

The Company’s financing and customer securities activities involve the Company using securities as collateral. In the event that the counterparty does not meet its contractual obligation to return securities used as collateral, or customers do not deposit additional securities or cash for margin when required, the Company may be exposed to the risk of reacquiring the securities or selling the securities at unfavorable market prices in order to satisfy its obligations to its customers or counterparties. The Company seeks to control this risk by monitoring the market value of securities pledged or used as collateral on a daily basis and requiring adjustments in the event of excess market exposure.

In the normal course of business, the Company obtains securities purchased under agreements to resell, securities borrowed and margin agreements on terms that permit it to repledge or resell the securities to others. The Company obtained securities with a fair value of approximately $332.1 million and $351.7 million at March 31, 2011 and December 31, 2010, respectively, of which $290.5 million and $309.9 million, respectively, had been either pledged or otherwise transferred to others in connection with the Company’s financing activities or to satisfy its commitments under financial instruments and other inventory positions sold, but not yet purchased.

At March 31, 2011, the Company’s securities sold under agreements to repurchase (“Repurchase Liabilities”) exceeded 10 percent of total assets. The following is a summary of Repurchase Liabilities, the fair market value of collateral pledged and the interest rate charged by the Company’s counterparty, which is based on LIBOR plus an applicable margin as of March 31, 2011:


	Repurchase		Fair Market
(Dollars in thousands)	Liabilities		Value		Interest Rates
Overnight maturities:
Corporate securities:
Fixed income securities	$	4,557	$	5,657	1.18%
Municipal securities:
Taxable securities		123,459		149,803	1.18%
Tax-exempt securities		38,376		46,786	1.18%
Short-term securities		8,608		10,448	1.18%
On demand maturities:
Corporate securities:
Fixed income securities		30,730		31,987	0.65 - 0.95%
U.S. government agency securities		97,952		109,639	0.40 - 1.18%
U.S. government securities		7,682		7,650	0.30%
Asset-backed securities		8,914		12,882	1.68%

	$	320,278	$	374,852

Note 10 Other Assets

Other assets include net deferred tax assets, prepaid expenses and proprietary investments. The Company’s investments include direct equity investments in public companies, investments in private companies and partnerships, warrants of public or private companies, private company debt and investments to fund deferred compensation liabilities.

Other assets at March 31, 2011 and December 31, 2010 included:


	March 31,		December 31,
(Dollars in thousands)	2011		2010
Net deferred income tax assets	$	47,019	$	62,180
Investments at fair value		22,033		14,643
Investments at cost		22,553		28,794
Investments accounted for under the equity method		19,002		16,653
Prepaid expenses		9,070		8,897
Other		5,435		2,363

Total other assets	$	125,112	$	133,530

Management regularly reviews the Company’s investments in private company debt and has concluded that no valuation allowance is needed as it is probable that all contractual principal and interest will be collected.

At March 31, 2011, the estimated fair market value of investments carried at cost totaled $28.3 million. The estimated fair value of investments carried at cost was measured using valuation techniques involving market data for comparable companies (e.g., multiples of revenue and earnings before income tax, depreciation and amortization (EBITDA)). Valuation adjustments, based upon management’s judgment, were made to account for differences between the measured security and comparable securities.

Investments accounted for under the equity method include general and limited partnership interests. These interests are carried at estimated fair value. The net assets of investment partnerships consist of investments in both marketable and non-marketable securities. The underlying investments held by such partnerships are valued based on the estimated fair value ultimately determined by management in our capacity as general partner or investor and, in the case of an investment in an unaffiliated investment partnership, are based on financial statements prepared by an unaffiliated general partner.

Note 11 Goodwill and Intangible Assets

The following table presents the changes in the carrying value of goodwill and intangible assets for the three months ended March 31, 2011:


	Capital Markets		Asset Management			Total
Goodwill
Balance at December 31, 2010	$	120,298	$	202,296		$	322,594
FAMCO earn-out payment		-		56			56

Balance at March 31, 2011	$	120,298	$	202,352		$	322,650


Intangible assets
Balance at December 31, 2010	$	-	$	59,580		$	59,580
Amortization of intangible assets		-		(2,069	)		(2,069	)

Balance at March 31, 2011	$	-	$	57,511		$	57,511

Note 12 Short-Term Financing

The following is a summary of short-term financing and the weighted average interest rate on borrowings as of March 31, 2011 and December 31, 2010:


					Weighted Average
	Outstanding Balance				Interest Rate
	March 31,		December 31,		March 31,			December 31,
(Dollars in thousands)	2011		2010		2011			2010
Bank lines (secured)	$	20,000	$	70,000		0.90	%		1.31	%
Commercial paper (secured)		105,213		123,589		1.29	%		1.28	%

Total short-term financing	$	125,213	$	193,589

The Company has committed short-term bank line financing available on a secured basis and uncommitted short-term bank line financing available on both a secured and unsecured basis. The Company uses these credit facilities in the ordinary course of business to fund a portion of its daily operations and the amount borrowed under these credit facilities varies daily based on the Company’s funding needs.

The Company’s committed short-term bank line financing at March 31, 2011 consisted of a $250 million committed revolving credit facility with U.S. Bank, N.A., which was renewed in December 2010. Advances under this facility are secured by certain marketable securities. The facility includes a covenant that requires the Company’s U.S. broker dealer subsidiary to maintain a minimum net capital of $150 million, and the unpaid principal amount of all advances under this facility will be due on December 30, 2011. The Company pays a nonrefundable commitment fee on the unused portion of the facility on a quarterly basis.

The Company’s uncommitted secured lines at March 31, 2011 totaled $275 million with three banks and are dependent on having appropriate collateral, as determined by the bank agreement, to secure an advance under the line. The availability of the Company’s uncommitted lines are subject to approval by the individual banks each time an advance is requested and may be denied. In addition, the Company has established arrangements to obtain financing by another broker dealer at the end of each business day related specifically to its convertible inventory.

The Company issues secured commercial paper to fund a portion of its securities inventory. The senior secured commercial paper notes (“Series A CP Notes”) are secured by the Company’s securities inventory with maturities on the Series A CP Notes ranging from 28 days to 270 days from the date of issuance. The Series A CP Notes are interest bearing or sold at a discount to par with an interest rate based on LIBOR plus an applicable margin.

Note 13 Long-Term Financing

The following is a summary of long-term financing and the weighted average interest rate on borrowings as of March 31, 2011 and December 31, 2010:


					Weighted Average
	Outstanding Balance				Interest Rate
	March 31,		December 31,		March 31,			December 31,
(Dollars in thousands)	2011		2010		2011			2010
Term loan	$	97,500	$	100,000		3.06	%		5.00	%
Revolving credit facility		25,000		25,000		3.56	%		5.50	%

Total long-term financing	$	122,500	$	125,000

On December 29, 2010, the Company entered into a three-year bank syndicated credit agreement (the “Credit Agreement”) comprised of a $100 million amortizing term loan and a $50 million revolving credit facility. SunTrust Bank is the administrative agent (“Agent”) for the lenders. Pursuant to the Credit Agreement, the term loan and revolving credit facility mature on December 29, 2013. The term loan is payable in equal quarterly installments in annual amounts as set forth below:


(Dollars in thousands)
Remainder of 2011	$	7,500
Due in 2012		25,000
Due in 2013		65,000

	$	97,500

The interest rate for borrowing under the Credit Agreement is, at the option of the Company, equal to LIBOR or a base rate plus an applicable margin, adjustable and payable quarterly. The base rate is defined as the highest of the Agent’s prime lending rate, the Federal Funds Rate plus 0.50 percent or LIBOR plus 1.00 percent. The applicable margin varies from 1.50 percent to 3.00 percent and is based on the Company’s leverage ratio. The Company also pays a nonrefundable commitment fee on the unused portion of the revolving credit facility on a quarterly basis. In addition, the aggregate debt issuance costs will be recognized as additional interest expense over the three-year life under the effective yield interest expense method.

The Company’s Credit Agreement is recorded at amortized cost. As of March 31, 2011, the carrying value of the Credit Agreement approximates fair value.

The Credit Agreement includes customary events of default, including failure to pay principal when due or failure to pay interest within three business days of when due, failure to comply with the covenants in the Credit Agreement and related documents, failure to pay or another event of default under other material indebtedness in an amount exceeding $5 million, bankruptcy or insolvency of the Company or any of its subsidiaries, a change in control of the Company or a failure of Piper Jaffray to extend, renew or refinance its existing $250 million committed revolving secured credit facility on substantially the same terms as the existing committed facility. If there is any event of default under the Credit Agreement, the Agent may declare the entire principal and any accrued interest on the loans under the Credit Agreement to be due and payable and exercise other customary remedies.

The Credit Agreement includes covenants that, among other things, limit the Company’s leverage ratio, require maintenance of certain levels of cash and regulatory net capital, require the Company’s asset management segment to achieve minimum earnings before interest, taxes, depreciation and amortization, and impose certain limitations on the Company’s ability to make acquisitions and make payments on its capital stock. With respect to the net capital covenant, the Company’s U.S. broker dealer subsidiary is required to maintain minimum net capital of $160 million. At March 31, 2011, the Company was in compliance with all covenants.

Note 14 Variable Rate Senior Notes

On December 31, 2009, the Company issued unsecured variable rate senior notes (“Notes”) in the amount of $120 million. The initial holders of the Notes were certain entities advised by PIMCO. Interest was based on an annual rate equal to LIBOR plus 4.10 percent, adjustable and payable quarterly. The proceeds from the Notes were used to fund a portion of the ARI acquisition discussed further in Note 4 to these consolidated financial statements. The unpaid principal and interest on the Notes were repaid on December 30, 2010, from the proceeds of the Credit Agreement discussed above in Note 13 to these consolidated financial statements.

Note 15 Contingencies and Commitments

Legal Contingencies

The Company has been named as a defendant in various legal actions, including complaints and litigation and arbitration claims, arising from its business activities. Such actions include claims related to securities brokerage and investment banking activities, and certain class actions that primarily allege violations of securities laws and seek unspecified damages, which could be substantial. Also, the Company is involved from time to time in investigations and proceedings by governmental agencies and self-regulatory organizations which could result in adverse judgments, settlement, penalties, fines or other relief.

The Company has established reserves for potential losses that are probable and reasonably estimable that may result from pending and potential legal actions, investigations and regulatory proceedings. In many cases, however, it is inherently difficult to determine whether any loss is probable or even possible or to estimate the amount or range of any potential loss, particularly where proceedings may be in relatively early stages or where plaintiffs are seeking substantial or indeterminate damages. Matters frequently need to be more developed before a loss or range of loss can reasonably be estimated. With respect to certain matters, the Company may be able to estimate probable losses or ranges of losses but does not believe, based on currently available information, that such losses will have a material effect on the Company’s consolidated financial condition.

Given uncertainties regarding the timing, scope, volume and outcome of pending and potential legal actions, investigations and regulatory proceedings and other factors, the amounts of reserves and ranges of reasonably possible losses are difficult to determine and of necessity subject to future revision. Subject to the foregoing and except for the legal proceeding described below, management of the Company believes, based on currently available information, after consultation with outside legal counsel and taking into account its established reserves, that pending legal actions, investigations and regulatory proceedings will be resolved with no material adverse effect on the consolidated financial condition of the Company. However, if during any period a potential adverse contingency should become probable or resolved for an amount in excess of the established reserves, the results of operations in that period could be materially adversely affected. In addition, there can be no assurance that material losses will not be incurred from claims that have not yet been brought to the Company’s attention or are not yet determined to be reasonably possible.

The Company is a defendant in one legal proceeding where management of the Company believes that a material loss is reasonably possible. The U.S. Department of Justice (“DOJ”), Antitrust Division, the SEC and various state attorneys general are conducting broad investigations of numerous firms, including the Company, for possible antitrust and securities violations in connection with the bidding or sale of guaranteed investment contracts and derivatives to municipal issuers from the early 1990s to date. These investigations commenced in November 2006. In addition, several class action complaints have been brought on behalf of a proposed class of government entities that purchased municipal derivatives. The complaints allege antitrust violations and civil fraud and are pending in a U.S. District Court under the multi-district litigation rules. No loss contingency has been reflected in the Company’s consolidated financial statements as this contingency is neither probable nor reasonably estimable at this time. Further, an estimate of the loss, or range of loss that is reasonably possible, cannot be made at this time.

Note 16 Restructuring

During 2010, the Company restructured its European operations to focus European resources on two areas: the distribution of U.S. and Asia securities to European institutional investors and merger and acquisition advisory services. As a result of the restructuring, the Company exited the origination and distribution of European securities and incurred pre-tax restructuring-related expenses of $9.3 million in 2010. As of March 31, 2011, the majority of these expenses had been paid out and the remaining restructuring-related liability associated with the Company’s European operations was not material.

Note 17 Shareholders’ Equity

Share Repurchase Program

In the third quarter of 2010, the Company’s board of directors authorized the repurchase of up to $75 million in common shares through September 30, 2012. During the three months ended March 31, 2011, the Company did not repurchase any shares of the Company’s common stock related to this authorization. The Company has $57.4 million remaining under this authorization.

Issuance of Shares

During the three months ended March 31, 2011, the Company issued 90,085 common shares out of treasury stock in fulfillment of $3.8 million in obligations under the Piper Jaffray Companies Retirement Plan and issued 1,064,031 common shares out of treasury stock as a result of vesting and exercise transactions under the Piper Jaffray Companies Amended and Restated 2003 Annual and Long-Term Incentive Plan.

Note 18 Earnings Per Share

The Company calculates earnings per share using the two-class method. Basic earnings per common share is computed by dividing net income applicable to common shareholders by the weighted average number of common shares outstanding for the period. Net income applicable to common shareholders represents net income reduced by the allocation of earnings to participating securities. Losses are not allocated to participating securities. All of the Company’s unvested restricted shares are deemed to be participating securities as they are eligible to share in the profits (e.g., receive dividends) of the Company. Diluted earnings per common share is calculated by adjusting the weighted average outstanding shares to assume conversion of all potentially dilutive stock options. The computation of earnings per share is as follows:


	Three Months Ended March 31,
(Amounts in thousands, except per share data)	2011			2010
Net income	$	7,233		$	510
Earnings allocated to participating securities		(1,522)	(2)		(101)	(2)

Net income applicable to common shareholders (1)	$	5,711		$	409


Shares for basic and diluted calculations:
Average shares used in basic computation		15,177			15,837
Stock options		47			87
Restricted stock		-	(2)		-	(2)

Average shares used in diluted computation		15,224			15,924


Earnings per share:
Basic	$	0.38		$	0.03
Diluted	$	0.38		$	0.03


(1)		Net income applicable to common shareholders for diluted and basic EPS may differ under the two-class method as a result of adding the effect of the assumed exercise of stock options to dilutive shares outstanding, which alters the ratio used to allocate earnings to common shareholders and participating securities for purposes of calculating diluted and basic EPS.

(2)		Participating securities were included in the calculation of diluted EPS using the two-class method, as this computation was more dilutive than the calculation using the treasury-stock method.

The anti-dilutive effects from stock options were immaterial for the three months ended March 31, 2011 and 2010.

Note 19 Employee Benefit Plans

The Company has various employee benefit plans including a tax-qualified retirement plan (the “Retirement Plan”), a post-retirement medical plan, and health and welfare plans. The Company terminated its non-qualified unfunded cash balance pension plan (the “Non-Qualified Plan”) in 2010 through lump-sum cash distributions to all participants. These lump-sum cash payments, totaling $10.4 million, were based on the December 31, 2009 actuarial

valuation of the Non-Qualified Plan and were distributed on March 15, 2010. For the three month period ended March 31, 2010, the Company recognized settlement expense of $0.2 million in compensation and benefits expense on the consolidated statements of operations related to the settlement of all Non-Qualified Plan liabilities.

Note 20 Stock-Based Compensation

The Company maintains two stock-based compensation plans, the Piper Jaffray Companies Amended and Restated 2003 Annual and Long-Term Incentive Plan (the “Incentive Plan”) and the 2010 Employment Inducement Award Plan (the “Inducement Plan”). The Company’s equity awards are recognized on the consolidated statements of operations at grant date fair value over the service period of the award, net of estimated forfeitures.

The following table provides a summary of the Company’s outstanding equity awards as of March 31, 2011:


*Incentive Plan*
Restricted Stock
Annual grants			1,837,249
Sign-on grants			451,319
Retention grants			185,274
Performance grants			307,820

			2,781,662

*Inducement Plan*
Restricted Stock			116,610


Total restricted stock related to compensation			2,898,272

ARI deal consideration (1)			661,380


Total restricted stock outstanding			3,559,652


*Incentive Plan*
Stock options outstanding			514,089


(1)		The Company issued restricted stock as part of deal consideration for ARI. See Note 4 for further discussion.

Incentive Plan

The Incentive Plan permits the grant of equity awards, including restricted stock and non-qualified stock options, to the Company’s employees and directors for up to 7.0 million shares of common stock. The Company believes that such awards help align the interests of employees and directors with those of shareholders and serve as an employee retention tool. The plan provides for accelerated vesting of awards if there is a severance event, a change in control of the Company (as defined in the plan), in the event of a participant’s death, and at the discretion of the compensation committee of the Company’s board of directors.

Restricted Stock Awards

Restricted stock grants are valued at the market price of the Company’s common stock on the date of grant and are amortized over the related requisite service period. The Company grants shares of restricted stock to current employees as part of year-end compensation (“Annual Grants”) and as a retention tool. New employees may receive restricted stock as “sign-on” awards. The Company has also granted incremental restricted stock awards with service conditions to key employees (“Retention Grants”) and restricted stock with performance conditions to members of senior management (“Performance Grants”).

The Company’s Annual Grants are made each year in February. Prior to 2011, Annual Grants had three-year cliff vesting periods. Beginning in 2011, Annual Grants vest ratably over three years in equal installments. The Annual Grants provide for continued vesting after termination of employment, so long as the employee does not violate certain post-termination restrictions set forth in the award agreement or any agreements entered into upon termination. The vesting period refers to the period in which post-termination restrictions apply. The Company

determined the service inception date precedes the grant date for the Annual Grants, and that the post-termination restrictions do not meet the criteria for an in-substance service condition, as defined by FASB Accounting Standards Codification Topic 718, “Compensation — Stock Compensation” (“ASC 718”). Accordingly, restricted stock granted as part of the Annual Grants is expensed in the one-year period in which those awards are deemed to be earned, which is generally the calendar year preceding the February grant date. For example, the Company recognized compensation expense during fiscal 2010 for our February 2011 Annual Grants. If an equity award related to the Annual Grants is forfeited as a result of violating the post-termination restrictions, the lower of the fair value of the award at grant date or the fair value of the award at the date of forfeiture is recorded within the consolidated statements of operations as other income. The Company recorded $0.1 million and $1.6 million of forfeitures through other income for the three months ended March 31, 2011 and 2010, respectively.

Sign-on grants are used as a recruiting tool for new employees and issued to current employees as a retention tool. The majority of sign-on awards have three-year cliff vesting terms and employees must fulfill service requirements in exchange for rights to the awards. Compensation expense is amortized on a straight-line basis from the date of grant over the requisite service period. Employees forfeit unvested shares upon termination of employment and a reversal of compensation expense is recorded.

Retention Grants are subject to ratable vesting based upon a five-year service requirement and are amortized as compensation expense on a straight-line basis from the grant date over the requisite service period. Employees forfeit unvested retention shares upon termination of employment and a reversal of compensation expense is recorded.

Performance-based restricted stock awards granted in 2008 and 2009 cliff vest upon meeting a specific performance-based metric prior to May 2013. Performance Grants are amortized on a straight-line basis over the period the Company expects the performance target to be met. The performance condition must be met for the awards to vest and total compensation cost will be recognized only if the performance condition is satisfied. The probability that the performance conditions will be achieved and that the awards will vest is reevaluated each reporting period with changes in actual or estimated outcomes accounted for using a cumulative effect adjustment to compensation expense. In 2010, the Company deemed it improbable that the performance condition related to the performance-based restricted stock grants would be met.

Annually, the Company grants stock to its non-employee directors. The stock-based compensation paid to non-employee directors is fully expensed on the grant date and included within outside services expense on the consolidated statements of operations.

Stock Options

The Company previously granted options to purchase Piper Jaffray Companies common stock to employees and non-employee directors in fiscal years 2004 through 2008. Employee and director options were expensed by the Company on a straight-line basis over the required service period, based on the estimated fair value of the award on the date of grant using a Black-Scholes option-pricing model. As described above pertaining to the Company’s Annual Grants of restricted shares, stock options granted to employees were expensed in the calendar year preceding the annual February grant date. For example, the Company recognized compensation expense during fiscal 2007 for our annual February 2008 option grant. The maximum term of the stock options granted to employees and directors is ten years.

The Company did not grant stock options during the three months ended March 31, 2011 and 2010, respectively.

Inducement Plan

In 2010, the Company established the Inducement Plan in conjunction with the acquisition of ARI. The Company granted $7.0 million in restricted stock (158,801 shares) under the Inducement Plan to ARI employees upon closing of the transaction. These shares vest ratably over five years in equal annual installments ending on March 1, 2015. Inducement Plan awards are amortized as compensation expense on a straight-line basis over the vesting period. Employees forfeit unvested Inducement Plan shares upon termination of employment and a reversal of compensation expense is recorded.

The Company recorded total compensation expense of $9.2 million and $8.6 million for the three months ended March 31, 2011 and 2010, respectively, related to employee restricted stock awards. The tax benefit related to stock-based compensation costs totaled $3.6 million and $3.4 million for the three months ended March 31, 2011 and 2010, respectively.

The following table summarizes the changes in the Company’s unvested restricted stock (including the restricted stock issued as part of the deal consideration for ARI) under the Incentive Plan and Inducement Plan for the three months ended March 31, 2011:


				Weighted
	Unvested			Average
	Restricted			Grant Date
	Stock			Fair Value
December 31, 2010		4,523,184		$	39.84
Granted		605,688			42.34
Vested		(1,503,044	)		40.15
Cancelled		(66,176	)		38.31

March 31, 2011		3,559,652		$	37.94

As of March 31, 2011, there was $16.3 million of total unrecognized compensation cost related to restricted stock expected to be recognized over a weighted average period of 2.67 years.

The following table summarizes the changes in the Company’s outstanding stock options for the three months ended March 31, 2011:

Weighted Average

Weighted

Remaining

Aggregate

Options

Average

Contractual

Intrinsic

Outstanding

Exercise Price

Term (Years)

Value

December 31, 2010

515,492

44.64

4.9

166,406

Granted

Exercised

(799

)

39.62

Cancelled

(604

)

39.62

March 31, 2011

514,089

44.65

4.6

558,539

Options exercisable at March 31, 2011

514,089

44.65

4.6

558,539

As of March 31, 2011, there was no unrecognized compensation cost related to stock options expected to be recognized over future years.

Cash received from option exercises for the three months ended March 31, 2011 was immaterial. Cash received from option exercises for the three months ended March 31, 2010 was $0.1 million. The tax benefit realized for the tax deductions from option exercises was immaterial for the three months ended March 31, 2011 and 2010, respectively.

Note 21 Segment Reporting

On March 1, 2010, the Company completed the purchase of ARI, which expanded the Company’s asset management business and resulted in a change to its reportable business segments in the second quarter of 2010. In connection with this change, the Company has reclassified prior period segment results to conform to the current period presentation.

Basis for Presentation

The Company structures its segments primarily based upon the nature of the financial products and services provided to customers and the Company’s management organization. It evaluates performance and allocates resources based on segment pre-tax operating income or loss and segment pre-tax operating margin. Revenues and expenses directly associated with each respective segment are included in determining their operating results. Other revenues and expenses that are not directly attributable to a particular segment are allocated based upon the Company’s allocation methodologies, including each segment’s respective net revenues, use of shared resources,

headcount or other relevant measures. The financial management of assets is performed on an enterprise-wide basis. As such, assets are not assigned to the business segments.

Reportable segment financial results are as follows:


	Three Months Ended March 31,
(Dollars in thousands)	2011			2010
Capital Markets

Investment banking
Financing
Equities	$	24,682		$	16,988
Debt		9,666			15,181
Advisory services		13,424			11,975

Total investment banking		47,772			44,144

Institutional sales and trading
Equities		25,739			26,927
Fixed income		29,189			27,376

Total institutional sales and trading		54,928			54,303

Other income		3,880			1,985


Net revenues		106,580			100,432

Operating expenses (1)		99,506			93,026


Segment pre-tax operating income	$	7,074		$	7,406


Segment pre-tax operating margin		6.6	%		7.4	%

Asset Management

Management and performance fees
Management fees	$	17,812		$	8,815
Performance fees		117			339

Total management and performance fees		17,929			9,154

Other income		271			-


Net revenues		18,200			9,154

Operating expenses (1)		13,926			7,405


Segment pre-tax operating income	$	4,274		$	1,749


Segment pre-tax operating margin		23.5	%		19.1	%

Total

Net revenues	$	124,780		$	109,586

Operating expenses (1)		113,432			100,431


Total segment pre-tax operating income	$	11,348		$	9,155


Pre-tax operating margin		9.1	%		8.4	%


(1)		Operating expenses include intangible asset amortization as set forth in the table below:


	Three Months Ended March 31,
(Dollars in thousands)	2011		2010
Capital Markets	$	-	$	-
Asset Management		2,069		976

Total amortization	$	2,069	$	976

Geographic Areas

The Company operates in both U.S. and non-U.S. markets. The Company’s non-U.S. business activities are conducted through European and Asian locations. Net revenues disclosed in the following table reflect the regional view, with underwriting revenues allocated to geographic locations based upon the location of the issuing client, advisory revenues allocated based upon the location of the investment banking team and net institutional sales and trading revenues allocated based upon the location of the client.


	Three Months Ended
	March 31,
(Dollars in thousands)	2011		2010
Net revenues:
United States	$	114,078	$	95,016
Asia		2,193		7,075
Europe		8,509		7,495

Consolidated	$	124,780	$	109,586

Long-lived assets are allocated to geographic locations based upon the location of the asset. The following table presents long-lived assets by geographic region:


	March 31,		December 31,
(Dollars in thousands)	2011		2010
Long-lived assets:
United States	$	434,839	$	451,892
Asia		13,778		13,391
Europe		423		547

Consolidated	$	449,040	$	465,830

Note 22 Net Capital Requirements and Other Regulatory Matters

Piper Jaffray is registered as a securities broker dealer with the SEC and is a member of various self regulatory organizations (“SROs”) and securities exchanges. The Financial Industry Regulatory Authority (“FINRA”) serves as Piper Jaffray’s primary SRO. Piper Jaffray is subject to the uniform net capital rule of the SEC and the net capital rule of FINRA. Piper Jaffray has elected to use the alternative method permitted by the SEC rule, which requires that it maintain minimum net capital of the greater of $1.0 million or 2 percent of aggregate debit balances arising from customer transactions, as such term is defined in the SEC rule. Under its rules, FINRA may prohibit a member firm from expanding its business or paying dividends if resulting net capital would be less than 5 percent of aggregate debit balances. Advances to affiliates, repayment of subordinated debt, dividend payments and other equity withdrawals by Piper Jaffray are subject to certain notification and other provisions of the SEC and FINRA rules. In addition, Piper Jaffray is subject to certain notification requirements related to withdrawals of excess net capital.

At March 31, 2011, net capital calculated under the SEC rule was $197.7 million, and exceeded the minimum net capital required under the SEC rule by $196.7 million.

The Company’s short-term committed credit facility of $250 million includes a covenant requiring Piper Jaffray to maintain minimum net capital of $150 million. In addition, the Company’s three-year bank syndicated credit facility includes a similar covenant, requiring minimum net capital of $160 million.

Piper Jaffray Ltd., which is a registered United Kingdom broker dealer, is subject to the capital requirements of the U.K. Financial Services Authority (“FSA”). As of March 31, 2011, Piper Jaffray Ltd. was in compliance with the capital requirements of the FSA.

Piper Jaffray Asia Holdings Limited operates three entities licensed by the Hong Kong Securities and Futures Commission, which are subject to the liquid capital requirements of the Securities and Futures (Financial Resources) Rules promulgated under the Securities and Futures Ordinance. As of March 31, 2011, Piper Jaffray Asia regulated entities were in compliance with the liquid capital requirements of the Hong Kong Securities and Futures Ordinance.

Note 23 Income Taxes

The Company’s effective income tax rate for the three months ended March 31, 2011 was 36.3%, compared to 94.4% for the three months ended March 31, 2010. The provision for income taxes for the three months ended March 31, 2010 was unusually high due to a $5.2 million write-off of a deferred tax asset resulting from a restricted stock grant that vested at a share price lower than the grant date share price. This item unfavorably impacted the Company’s earnings for the three months ended March 31, 2010 by approximately $0.26 per share.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following information should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes and exhibits included elsewhere in this report. Certain statements in this report may be considered forward-looking. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. These forward looking statements include, among other things, statements other than historical information or statements of current condition and may relate to our future plans and objectives and results, and also may include our belief regarding the effect of various legal proceedings, as set forth under “Legal Proceedings” in Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2010 and in our subsequent reports filed with the SEC. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including those factors discussed below under “External Factors Impacting Our Business” as well as the factors identified under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010, as updated in our subsequent reports filed with the SEC. These reports are available at our Web site at www.piperjaffray.com and at the SEC Web site at www.sec.gov. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them in light of new information or future events.

Executive Overview

Our business principally consists of providing investment banking, institutional brokerage, asset management and related financial services to corporations, private equity groups, public entities, non-profit entities and institutional investors in the United States, Asia and Europe. We operate through two reportable business segments:

Capital Markets – The Capital Markets segment provides institutional sales, trading and research services and investment banking services. Institutional sales, trading and research services focus on the trading of equity and fixed income products with institutions, government, and non-profit entities. Revenues are generated through commissions and sales credits earned on equity and fixed income institutional sales activities, net interest revenues on trading securities held in inventory, profits and losses from trading these securities and strategic trading opportunities. Investment banking services include management of and participation in underwritings, merger and acquisition services and public finance activities. Revenues are generated through the receipt of advisory and financing fees.

Asset Management – The Asset Management segment provides asset management services with product offerings in equity and fixed income securities to institutions and high net worth individuals through proprietary distribution channels. Revenues are generated in the form of management fees and performance fees. The majority of our performance fees, if earned, are recognized in the fourth quarter. As part of our growth strategy, we expanded our asset management business in 2010 through the acquisition of Advisory Research, Inc. (“ARI”), a Chicago-based asset management firm. The transaction closed on March 1, 2010. For more information on our acquisition of ARI, see Note 4 of the accompanying consolidated financial statements included in this report.

Our business is a human capital business. Accordingly, compensation and benefits comprise the largest component of our expenses, and our performance is dependent upon our ability to attract, develop and retain highly skilled employees who are motivated and committed to providing the highest quality of service and guidance to our clients.

Results for the three months ended March 31, 2011

For the three months ended March 31, 2011, we recorded net income of $7.2 million, or $0.38 per diluted common share, compared with net income of $0.5 million, or $0.03 per diluted common share for the corresponding period in the prior year. Results for the three months ended March 31, 2010, included tax expense of $5.2 million (or $0.26 per diluted share) attributable to a write-off of a deferred tax asset resulting from a restricted stock grant that vested at a share price lower than the grant date share price. For the three months ended March 31, 2011, non-compensation expenses were $37.9 million, an increase of $2.6 million compared to the first quarter of 2010, mainly attributable to a full quarter of expenses related to ARI, including intangible amortization expense related to the acquisition, compared to one month of ARI expenses in the prior year quarter and higher charitable contribution expense as we funded the majority of our 2011 charitable contribution commitment by donating appreciated stock to the Piper

Jaffray Foundation. Net revenues for the three months ended March 31, 2011 were $124.8 million, up 13.9 percent from $109.6 million reported in the year-ago period driven primarily by higher asset management revenues, from our acquisition of ARI, and increased equity financing revenues.

External Factors Impacting Our Business

Performance in the financial services industry in which we operate is highly correlated to the overall strength of economic conditions and financial market activity. Overall market conditions are a product of many factors, which are beyond our control and mostly unpredictable. These factors may affect the financial decisions made by investors, including their level of participation in the financial markets. In turn, these decisions may affect our business results. With respect to financial market activity, our profitability is sensitive to a variety of factors, including the demand for investment banking services as reflected by the number and size of equity and debt financings and merger and acquisition transactions, the volatility of the equity and fixed income markets, changes in interest rates (especially rapid and extreme changes), the level and shape of various yield curves, the volume and value of trading in securities, and the demand for asset management services as reflected by the amount of assets under management.

Factors that differentiate our business within the financial services industry also may affect our financial results. For example, our business focuses on a middle-market clientele in specific industry sectors. If the business environment for our focus sectors is impacted disproportionately as compared to the economy as a whole, or does not recover on pace with other sectors of the economy, our business and results of operations will be negatively impacted. In addition, our business could be affected differently than overall market trends. Given the variability of the capital markets and securities businesses, our earnings may fluctuate significantly from period to period, and results for any individual period should not be considered indicative of future results.

As a participant in the financial services industry, we are subject to complex and extensive regulation of our business. In recent years and following the credit crisis of 2008, legislators and regulators increased their focus on the regulation of the financial services industry, resulting in fundamental changes to the manner in which the industry is regulated and increased regulation in a number of areas. For example, the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in 2010 bringing sweeping change to financial services regulation in the U.S. Changes in the regulatory environment in which we operate could affect our business and the competitive environment, potentially adversely.

Outlook for the remainder of 2011

Equity financing revenues in the first quarter of 2011 reflected solid equity financing activity from U.S.-based issuers, but minimal equity financing activity from China-based issuers. We expect Asia capital markets activity to be weighted towards the second half of 2011. If the capital markets remain favorable in 2011, growth sectors of equity capital markets and advisory services should benefit. However, we remain cautious about the potential for volatile periods in the capital markets in the year ahead. Debt financing revenues were negatively impacted in the first quarter of 2011 by the historically low municipal underwriting levels seen industry-wide. We expect the municipal underwriting market to remain challenging as state and local governments reduce their debt levels. Additionally, fixed income institutional sales and trading revenues will be negatively impacted by reduced municipal sales and trading activity due to reduced investor demand and concerns about municipal-issuer credit quality. Investors are showing a lack of demand for longer-dated municipals and are reluctant to take on credit or liquidity risks. Our asset management business generally performed well during the first quarter of 2011 and we gained significant new assets in the master-limited partnership (“MLP”) product. Market appreciation of customer assets in the first quarter of 2011 more than offset the net cash outflows of approximately $200 million. A majority of the exiting assets were in lower yielding asset strategies. We believe that management fees from new client inflows, at higher management fees, will mitigate the revenue loss from client outflows.

Restructuring of European Operations

In the fourth quarter of 2010, we restructured our European operations to focus European resources on two areas: the distribution of U.S. and Asia securities to European institutional investors and merger and acquisition advisory services. With the narrowed focus, our European team has experienced success in the first quarter of 2011 and was a solid contributor to our first quarter results.

Results of Operations

Financial Summary

The following table provides a summary of the results of our operations and the results of our operations as a percentage of net revenues for the periods indicated.


									As a Percentage of Net
	For the Three Months Ended								Revenues
	March 31,								For the Three Months Ended
					2011				March 31,
(Dollars in thousands)	2011		2010		v2010				2011			2010
Revenues:

Investment banking	$	47,041	$	43,748		7.5		%		37.7	%		39.9	%
Institutional brokerage		48,231		49,095		(1.8	)			38.7			44.8
Asset management		17,929		9,154		95.9				14.4			8.4
Interest		14,229		13,449		5.8				11.4			12.2
Other income		5,511		2,927		88.3				4.3			2.7


Total revenues		132,941		118,373		12.3				106.5			108.0

Interest expense		8,161		8,787		(7.1	)			6.5			8.0


Net revenues		124,780		109,586		13.9				100.0			100.0


Non-interest expenses:

Compensation and benefits		75,545		65,096		16.1				60.5			59.4
Occupancy and equipment		8,448		7,669		10.2				6.8			7.0
Communications		6,611		6,489		1.9				5.3			5.9
Floor brokerage and clearance		2,466		2,617		(5.8	)			2.0			2.4
Marketing and business development		6,210		5,322		16.7				5.0			4.9
Outside services		8,106		8,004		1.3				6.5			7.3
Intangible asset amortization expense		2,069		976		112.0				1.7			0.9
Other operating expenses		3,977		4,258		(6.6	)			3.1			3.8


Total non-interest expenses		113,432		100,431		12.9				90.9			91.6


Income before income tax expense		11,348		9,155		24.0				9.1			8.4

Income tax expense		4,115		8,645		(52.4	)			3.3			7.9


Net income	$	7,233	$	510		1318.2		%		5.8	%		0.5	%

For the three months ended March 31, 2011, we recorded net income of $7.2 million. Net revenues for the three months ended March 31, 2011 were $124.8 million, a 13.9 percent increase from the year-ago period. For the three months ended March 31, 2011, investment banking revenues increased 7.5 percent to $47.0 million, compared with revenues of $43.7 million in the prior-year period. The increase in investment banking revenues was primarily attributable to higher equity financing activity, partially offset by lower municipal underwriting activity, which was at historic lows industry-wide in the first quarter of 2011. For the three months ended March 31, 2011, institutional brokerage revenues decreased slightly to $48.2 million, compared with $49.1 million in the corresponding period in the prior year, due to our exit of distribution of European securities completed in the fourth quarter of 2010. For the three months ended March 31, 2011, asset management fees were $17.9 million, compared with $9.2 million in the prior-year period. The increased revenues were driven by the results for ARI, which we acquired on March 1, 2010. In the first quarter of 2011, net interest income increased 30.2 percent to $6.1 million, compared with $4.7 million in the first quarter of 2010. The increase was primarily the result of higher interest income earned on net inventory balances, particularly related to municipal securities and hybrid preferred securities. For the three months ended March 31, 2011, other income increased to $5.5 million, compared with $2.9 million in the corresponding period in the prior year, due to gains recorded on our merchant banking activities and firm investments, partially offset by a decline in income associated with forfeitures of stock-based compensation. Non-interest expenses increased to

$113.4 million for the three months ended March 31, 2011, from $100.4 million in the corresponding period in the prior year.

Consolidated Non-Interest Expenses

Compensation and Benefits - Compensation and benefits expenses, which are the largest component of our expenses, include salaries, incentive compensation, benefits, stock-based compensation, employment taxes and other employee costs. A portion of compensation expense is comprised of variable incentive arrangements, including discretionary incentive compensation, the amount of which fluctuates in proportion to the level of business activity, increasing with higher revenues and operating profits. Other compensation costs, primarily base salaries and benefits, are more fixed in nature. The timing of incentive compensation payments, which generally occur in February, have a greater impact on our cash position and liquidity than is reflected in our consolidated statements of operations.

For the three months ended March 31, 2011, compensation and benefits expenses increased 16.1 percent to $75.5 million from $65.1 million in the corresponding period in 2010. This increase was due to higher variable compensation costs resulting from increased net revenues and profitability, and a full quarter of compensation and benefits expense from ARI. Compensation and benefits expenses as a percentage of net revenues were 60.5 percent for the first quarter of 2011, compared with 59.4 percent for the first quarter of 2010.

Occupancy and Equipment — In the first quarter of 2011, occupancy and equipment expenses were $8.4 million, compared with $7.7 million for the corresponding period in 2010. The increase was attributable to a full quarter of occupancy expense from ARI as well as higher occupancy costs as we moved to new space in New York City and Hong Kong in the fourth quarter of 2010.

Communications — Communication expenses include costs for telecommunication and data communication, primarily consisting of expenses for obtaining third-party market data information. For the three months ended March 31, 2011, communications expenses were $6.6 million, essentially flat compared with the three months ended March 31, 2010.

Floor Brokerage and Clearance — For the three months ended March 31, 2011, floor brokerage and clearance expenses were $2.5 million, essentially flat compared with the three months ended March 31, 2010.

Marketing and Business Development — Marketing and business development expenses include travel and entertainment and promotional and advertising costs. In the first quarter of 2011, marketing and business development expenses increased 16.7 percent to $6.2 million, compared with $5.3 million in the first quarter of 2010. This increase was driven by travel expenses written-off related to deals that were never completed due to volatility in the capital markets and a full quarter of travel expenses related to ARI.

Outside Services — Outside services expenses include securities processing expenses, outsourced technology functions, outside legal fees and other professional fees. Outside services expenses were $8.1 million, essentially flat compared with the three months ended March 31, 2010.

Intangible Asset Amortization Expense — Intangible asset amortization expense include the amortization of definite-lived intangible assets consisting of asset management contractual relationships, non-compete agreements and certain trade names and trademarks. In the first quarter of 2011, intangible asset amortization expense was $2.1 million, compared with $1.0 million for the prior-year period. The increase reflects a full quarter of intangible asset amortization expense related to the acquisition of ARI.

Other Operating Expenses — Other operating expenses include insurance costs, license and registration fees, expenses related to our charitable giving program and litigation-related expenses, which consist of the amounts we reserve and/or pay out related to legal and regulatory matters. In the first quarter of 2011, other operating expenses were $4.0 million, compared with $4.3 million in the first quarter of 2010 due to a decline in litigation-related expenses, partially offset by increased charitable contributions expense as we funded the majority of our 2011 charitable contribution commitment by donating appreciated stock to the Piper Jaffray Foundation.

Income Taxes — For the three months ended March 31, 2011, our provision for income taxes was $4.1 million, equating to an effective tax rate of 36.3 percent. For the three months ended March 31, 2010, our provision for income taxes was $8.6 million. Income tax expense recorded in the first quarter of 2010 was high compared to pre-tax income because of a $5.2 million write-off of a deferred tax asset resulting from a restricted stock grant that vested at a share price lower than the grant date share price.

Segment Performance

We measure financial performance by business segment. Our two reportable segments are Capital Markets and Asset Management. We determined these segments based upon the nature of the financial products and services provided to customers and the Company’s management organization. Segment pre-tax operating income or loss and segment pre-tax operating margin are used to evaluate and measure segment performance by our management team in deciding how to allocate resources and in assessing performance in relation to our competitors. Revenues and expenses directly associated with each respective segment are included in determining segment operating results. Other revenues and expenses that are not directly attributable to a particular segment are allocated based upon the Company’s allocation methodologies, generally based on each segment’s respective net revenues, use of shared resources, headcount or other relevant measures.

The following table provides our segment performance for the periods presented:


	Three Months Ended
	March 31,
							2011
	2011			2010			v2010
(Dollars in thousands)
Net revenues
Capital Markets	$	106,580		$	100,432			6.1		%
Asset Management		18,200			9,154			98.8

Total net revenues	$	124,780		$	109,586			13.9		%


Pre-tax operating income
Capital Markets	$	7,074		$	7,406			(4.5	)	%
Asset Management		4,274			1,749			144.4

Total pre-tax operating income	$	11,348		$	9,155			24.0		%


Pre-tax operating margin
Capital Markets		6.6	%		7.4	%
Asset Management		23.5	%		19.1	%
Total pre-tax operating margin		9.1	%		8.4	%

Capital Markets


	Three Months Ended
	March 31,
							2011
	2011			2010			v2010
(Dollars in thousands)
Net revenues:
Investment banking
Financing
Equities	$	24,682		$	16,988			45.3		%
Debt		9,666			15,181			(36.3	)
Advisory services		13,424			11,975			12.1

Total investment banking		47,772			44,144			8.2

Institutional sales and trading
Equities		25,739			26,927			(4.4	)
Fixed income		29,189			27,376			6.6

Total institutional sales and trading		54,928			54,303			1.2

Other income		3,880			1,985			95.5


Total net revenues	$	106,580		$	100,432			6.1		%


Pre-tax operating income	$	7,074		$	7,406			(4.5	)	%

Pre-tax operating margin		6.6	%		7.4	%

Capital Markets net revenues increased 6.1 percent to $106.6 million in the first quarter of 2011, compared with $100.4 million in 2010.

Investment banking revenues comprise all the revenues generated through financing and advisory services activities, including derivative activities that relate to debt financing. To assess the profitability of investment banking, we aggregate investment banking fees with the net interest income or expense associated with these activities.

Investment banking revenues increased 8.2 percent to $47.8 million in the first quarter of 2011, compared with $44.1 million for the corresponding period in 2010, due to increased equity financing and advisory services revenues, partially offset by a decline in debt financing revenues. For the three months ended March 31, 2011, equity financing revenues increased to $24.7 million, compared with $17.0 million in the prior-year period, resulting from increased equity financing activity from U.S.-based issuers, partially offset by lower Asia equity financing activity and our exit from origination of European securities completed in the fourth quarter of 2010. During the first quarter of 2011, we completed 19 equity financings (all U.S.-based issuers), raising $2.5 billion in capital for our clients, compared with 16 equity financings (13 related to U.S.-based issuers), raising $1.8 billion for the corresponding period in 2010. Debt financing revenues in the first quarter of 2011 decreased 36.3 percent to $9.7 million, compared with $15.2 million in the first quarter of 2010, due to a decline in public finance revenues. In the first quarter of 2011, our public finance revenues were negatively impacted by a significant industry-wide decline in municipal underwriting. For the industry, par value of new issuances dropped 55 percent due to reduced borrowing from state and local governments and the higher than average municipal issuance levels in the fourth quarter of 2010 as municipalities took advantage of the expiring Build America Bond program. During the first quarter of 2011, we completed 88 public finance issues with a total par value of $1.0 billion, compared with 113 public finance issues with a total par value of $1.7 billion during the prior-year period. We expect the municipal underwriting market to remain challenging during 2011. For the three months ended March 31, 2011, advisory services revenues increased 12.1 percent to $13.4 million due to higher European advisory services revenues and higher revenue per transaction.

We completed 8 transactions with an aggregate enterprise value of $1.0 billion during the first quarter of 2011, compared with 12 transactions with an aggregate enterprise value of $1.7 billion in the first quarter of 2010.

Institutional sales and trading revenues comprise all the revenues generated through trading activities, which consist primarily of facilitating customer trades. To assess the profitability of institutional brokerage activities, we aggregate institutional brokerage revenues with the net interest income or expense associated with financing, economically hedging and holding long or short inventory positions. Our results may vary from quarter to quarter as a result of changes in trading margins, trading gains and losses, net interest spreads, trading volumes and the timing of transactions based on market opportunities.

For the three months ended March 31, 2011, institutional brokerage revenues were essentially flat at $54.9 million, compared with the prior-year period, as higher fixed income institutional brokerage revenues was offset by lower equity institutional brokerage revenues. Equity institutional brokerage revenues decreased to $25.7 million in the first quarter of 2011, compared with $26.9 million in the prior period in 2010, primarily driven by our exit from the distribution of European securities completed in the fourth quarter of 2010. For the three months ended March 31, 2011, fixed income institutional brokerage revenues increased to $29.2 million, compared with $27.4 million in the prior-year period, as a decline in taxable sales and trading revenues was offset by strong municipal strategic trading revenues.

Other income includes gains and losses from our merchant banking activities and other firm investments, income associated with the forfeiture of stock-based compensation and interest expense related to firm funding. In the first quarter of 2011, other income increased to $3.9 million, compared with $2.0 million in the corresponding period in 2010, primarily as a result of gains associated with our merchant banking activities and firm investments, partially offset by a decline in income associated with forfeitures of stock-based compensation.

Capital Markets segment pre-tax operating margin for the first quarter of 2011 decreased to 6.6 percent, compared to 7.4 percent for the corresponding period in the prior year, as a result of a lower contribution margin from our public finance business, which operates at a higher margin.

Asset Management


	Three Months Ended
	March 31,
							2011
	2011			2010			v2010
(Dollars in thousands)
Net revenues:
Management fees	$	17,812		$	8,815			102.1		%
Performance fees		117			339			(65.5	)

Total management and performance fees		17,929			9,154			95.9

Other income		271			-			N/M


Net revenues	$	18,200		$	9,154			98.8		%

Pre-tax operating income	$	4,274		$	1,749			144.4		%

Pre-tax operating margin		23.5	%		19.1	%

N/M — Not meaningful

Management and performance fee revenues comprise all the revenues generated through management and investment advisory services performed for various funds and separately managed accounts. Performance fees are earned when the investment return on assets under management exceeds certain benchmark targets or other performance targets over a specified measurement period. The majority of performance fees, if earned, are recorded in the fourth quarter of the applicable year. Management and performance fee revenues increased 95.9 percent to

$17.9 million in the first quarter of 2011, compared with $9.2 million in the first quarter of 2010, due to the recognition of a full quarter of ARI’s management fee revenues. The acquisition of ARI was completed on March 1, 2010.

Other income includes gains and losses from our investments in funds and partnerships. Other income was $0.3 million for the first three months of 2011.

Operating expenses for the three months ended March 31, 2011 were $13.9 million, compared to $7.4 million in the prior period in 2010. The increased expense was due to a full quarter of expenses associated with ARI, which included $2.1 million of intangible amortization expense on customer contract intangible assets recorded in conjunction with the acquisition. Segment pre-tax operating margin for the first quarter of 2011 was 23.5 percent, compared to 19.1 percent for the corresponding period in the prior year.

The following table summarizes the changes in our assets under management for the three months ended March 31, 2011:


(Dollars in millions)
Assets under management:
Balance at December 31, 2010:	$	12,297

Net inflows/(outflows)		(203	)

Net market appreciation/(depreciation)		665


Balance at March, 31 2011:	$	12,759

Assets under management increased $0.5 billion to $12.8 billion in the first quarter of 2011. The increase in assets under management in the first quarter of 2011 resulted from market appreciation of $0.7 billion of the underlying assets in the funds as ARI product offerings and the FAMCO MLP product outperformed their respective benchmarks. Partially offsetting the market appreciation was net cash outflows of $0.2 billion as existing institutional clients changed investment strategies and reallocated assets. A majority of the exiting assets were in lower yielding asset strategies.

FAMCO won new client mandates of $0.8 billion in the first quarter of 2011, primarily related to the $0.5 billion Nuveen MLP Total Return closed-end fund, on which FAMCO will act as subadvisor. We believe that management fees from the new customer asset inflows, at higher management fees, will mitigate the revenue loss from client outflows.

Recent Accounting Pronouncements

Recent accounting pronouncements are set forth in Note 3 to our unaudited consolidated financial statements, and are incorporated herein by reference.

Critical Accounting Policies

Our accounting and reporting policies comply with generally accepted accounting principles (“GAAP”) and conform to practices within the securities industry. The preparation of financial statements in compliance with GAAP and industry practices requires us to make estimates and assumptions that could materially affect amounts reported in our consolidated financial statements. Critical accounting policies are those policies that we believe to be the most important to the portrayal of our financial condition and results of operations and that require us to make estimates that are difficult, subjective or complex. Most accounting policies are not considered by us to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical, including whether the estimates are significant to the consolidated financial statements taken as a whole, the nature of the estimates, the ability to readily validate the estimates with other information (e.g. third-party or independent sources), the sensitivity of the estimates to changes in economic conditions and whether alternative accounting methods may be used under GAAP.

For a full description of our significant accounting policies, see Note 2 to our consolidated financial statements included in our Annual Report on Form 10-K for the year-ended December 31, 2010. We believe that of our significant accounting policies, the following are our critical accounting policies.

Valuation of Financial Instruments

Financial instruments and other inventory positions owned, financial instruments and other inventory positions sold, but not yet purchased, and certain firm investments on our consolidated statements of financial condition consist of financial instruments recorded at fair value, either as required by accounting guidance or through the fair value election. Unrealized gains and losses related to these financial instruments are reflected on our consolidated statements of operations.

The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between market participants. The degree of judgment used in measuring fair value of financial instruments generally correlates to the level of pricing observability. When available, we use observable market prices, observable market parameters, or broker or dealer prices (bid and ask prices) to derive the fair value of the instrument. In the case of financial instruments transacted on recognized exchanges, the observable market prices represent quotations for completed transactions from the exchange on which the financial instrument is principally traded. Bid prices represent the highest price a buyer is willing to pay for a financial instrument at a particular time. Ask prices represent the lowest price a seller is willing to accept for a financial instrument at a particular time.

A substantial percentage of the fair value of our financial instruments and other inventory positions owned, and financial instruments and other inventory positions sold, but not yet purchased, are based on observable market prices, observable market parameters, or derived from broker or dealer prices. The availability of observable market prices and pricing parameters can vary from product to product and significant management judgment does not affect the determination of fair value. Where available, observable market prices and pricing or market parameters in a product may be used to derive a price without requiring significant judgment. In certain markets, observable market prices or market parameters are not available for all products, and fair value is determined using techniques appropriate for each particular product. These techniques may involve some degree of judgment. Results from valuation models and other valuation techniques in one period may not be indicative of the future period fair value measurement.

For investments in illiquid or privately held securities that do not have readily determinable fair values, the determination of fair value requires us to estimate the value of the securities using the best information available. Among the factors considered by us in determining the fair value of such financial instruments are the cost, terms and liquidity of the investment, the financial condition and operating results of the issuer, the quoted market price of publicly traded securities with similar quality and yield, and other factors generally pertinent to the valuation of investments. In instances where a security is subject to transfer restrictions, the value of the security is based primarily on the quoted price of a similar security without restriction but may be reduced by an amount estimated to reflect such restrictions. Even where the value of a security is derived from an independent source, certain assumptions may be required to determine the security’s fair value. For example, we assume that the size of positions that we hold would not be large enough to affect the quoted price of the securities if we sell them, and that any such sale would happen in an orderly manner. The actual value realized upon disposition could be different from the current estimated fair value.

Depending upon the product and terms of the transaction, the fair value of the Company’s derivative contracts can be observed or priced using models based on the net present value of estimated future cash flows. Our models generally incorporate inputs that we believe are representative of inputs other market participants would use to determine fair value of the same instruments, including contractual terms, market prices, yield curves, credit curves and measures of volatility. The valuation models are monitored over the life of the derivative product. If there are any changes in the underlying inputs, the model is updated for those new inputs.

FASB Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The objective of a fair value measurement is to determine the price 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). The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level I measurements) and the lowest priority to inputs with little or no pricing observability (Level III measurements). Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

The following table reflects the composition of our Level III assets and Level III liabilities by asset class:


	Level III
	March 31,			December 31,
(Dollars in thousands)	2011			2010
Assets:
Financial instruments and other inventory positions owned:
Corporate securities:
Equity securities	$	1,365		$	1,340
Convertible securities		5,073			2,885
Fixed income securities		96			6,268
Municipal securities:
Tax-exempt securities		3,707			6,118
Short-term securities		175			125
Asset-backed securities		51,062			45,170
Derivative contracts		4,113			4,665

Total financial instruments and other inventory positions owned:		65,591			66,571

Investments		17,900			9,682

Total assets	$	83,491		$	76,253


Liabilities:
Financial instruments and other inventory positions sold, but not yet purchased:
Corporate securities:
Convertible securities	$	1,913		$	1,777
Fixed income securities		160			2,323
Asset-backed securities		3,219			2,115
Derivative contracts		867			339

Total financial instruments and other inventory positions sold, but not yet purchased:		6,159			6,554

Investments		1,610			1

Total liabilities	$	7,769		$	6,555


The following table reflects activity with respect to our Level III assets and liabilities:

	Three Months Ended March 31,
(Dollars in thousands)	2011			2010
Assets:
Purchases/(sales), net	$	3,598		$	1,603
Net transfers in/(out)		7,782			21,367
Realized gains/(losses)		(2,231	)		3,735
Unrealized gains/(losses)		(1,911	)		3,026

Liabilities:
(Purchases)/sales, net	$	2,179		$	(724	)
Net transfers in/(out)		(1,455	)		507
Realized gains/(losses)		55			64
Unrealized gains/(losses)		435			223

See Note 6 in the consolidated financial statements for additional discussion of Level III assets and liabilities.

We employ specific control processes to determine the reasonableness of the fair value of our financial instruments. Our processes are designed to ensure that the values received or internally estimated are accurately recorded and that

the data inputs and the valuation techniques used are appropriate, consistently applied, and that the assumptions are reasonable and consistent with the objective of determining fair value. Individuals outside of the trading departments obtain independent fair values, as appropriate. Where a pricing model is used to determine fair value, recently executed comparable transactions and other observable market data are considered for purposes of validating assumptions underlying the valuation technique. These control processes are designed to ensure that the values used for financial reporting are based on observable inputs wherever possible. In the event that observable inputs are not available, the control processes are designed to ensure that the valuation approach utilized is appropriate and consistently applied and that the assumptions are reasonable.

Goodwill and Intangible Assets

We record all assets and liabilities acquired in purchase acquisitions, including goodwill and other intangible assets, at fair value. Determining the fair value of assets and liabilities acquired requires certain management estimates. At March 31, 2011, we had goodwill of $322.7 million. This goodwill balance primarily consists of $152.3 million recorded in 2010 as a result of the acquisition of ARI, $50.1 million recorded in 2007 as a result of the acquisition of FAMCO, and $105.5 million as a result of the 1998 acquisition by U.S. Bancorp of our predecessor, Piper Jaffray Companies Inc., and its subsidiaries.

Under FASB Accounting Standards Codification Topic 350, “Intangibles – Goodwill and Other,” we are required to perform impairment tests of our goodwill and indefinite-life intangible assets annually and on an interim basis when certain events or circumstances exist that could indicate possible impairment. We have elected to test for goodwill impairment in the fourth quarter of each calendar year. The goodwill impairment test is a two-step process, which requires management to make judgments in determining what assumptions to use in the calculation. The first step of the process consists of estimating the fair value of our reporting units based on the following factors: our market capitalization, a discounted cash flow model using revenue and profit forecasts, public market comparables and multiples of recent mergers and acquisitions of similar businesses. Valuation multiples may be based on revenues, price-to-earnings and tangible capital ratios of comparable public companies and business segments. These multiples may be adjusted to consider competitive differences including size, operating leverage and other factors. The estimated fair values of our reporting units are compared with their carrying values, which includes the allocated goodwill. If the estimated fair values are less than the carrying values, a second step is performed to compute the amount of the impairment by determining an “implied fair value” of goodwill. The determination of a reporting unit’s “implied fair value” of goodwill requires us to allocate the estimated fair value of the reporting unit to the assets and liabilities of the reporting unit. Any unallocated fair value represents the “implied fair value” of goodwill, which is compared to its corresponding carrying value.

As noted above, the initial recognition of goodwill and other intangible assets and the subsequent impairment analysis requires management to make subjective judgments concerning estimates of how the acquired assets or businesses will perform in the future using valuation methods including discounted cash flow analysis. Our estimated cash flows typically extend for five years and, by their nature, are difficult to determine over an extended time period. Events and factors that may significantly affect the estimates include, among others, competitive forces and changes in revenue growth trends, cost structures, technology, discount rates and market conditions. To assess the reasonableness of cash flow estimates and validate assumptions used in our estimates, we review historical performance of the underlying assets or similar assets. In assessing the fair value of our reporting units, the volatile nature of the securities markets and our industry requires us to consider the business and market cycle and assess the stage of the cycle in estimating the timing and extent of future cash flows.

We completed our annual goodwill impairment testing as of November 30, 2010, and no impairment was identified. We also tested the intangible assets (indefinite and definite-life) acquired as part of the FAMCO and ARI acquisitions and concluded there was no impairment.

Stock-Based Compensation

As part of our compensation to employees and directors, we use stock-based compensation, consisting of restricted stock and stock options. The Company accounts for equity awards in accordance with FASB Accounting Standards Codification Topic 718, “Compensation – Stock Compensation,” (“ASC 718”), which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the consolidated statements of operations at grant date fair value over the service period of the award, net of estimated forfeitures. We grant shares of restricted stock to current employees as part of year-end compensation (“Annual Grants”) and as a retention tool. New employees may receive restricted stock as “sign-on” awards. We have also granted restricted

stock awards with service conditions to key employees (“Retention Grants”), as well as restricted stock awards with performance conditions to members of senior management (“Performance Grants”). Upon closing of the ARI acquisition in March 2010, we granted restricted stock to ARI employees (“Inducement Grants”).

Annual Grants are made each February for the prior fiscal year performance and constitute a portion of an employee’s annual incentive for the prior year. We recognize the compensation expense prior to the grant date of the award as we determined that the service inception date precedes the grant date. These grants are not subject to service requirements that employees must fulfill in exchange for the right to these awards, as the grants continue to vest after termination of employment, so long as the employee does not violate certain post-termination restrictions as set forth in the award agreements or any agreements entered into upon termination. Prior to 2011, Annual Grants were subject to three-year cliff vesting. Beginning in 2011, Annual Grants are subject to annual ratable vesting over a three-year period. Unvested shares are subject to post-termination restrictions. These post-termination restrictions do not meet the criteria for an in-substance service condition as defined by ASC 718. Accordingly, such shares of restricted stock comprising Annual Grants are expensed in the period to which those awards are deemed to be earned, which is the calendar year preceding the February grant date. If any of these awards are forfeited, the lower of the fair value at grant date or the fair value at the date of forfeiture is recorded within the consolidated statements of operations as other income.

Sign-on equity awards are used as a recruiting tool for new employees and issued to current employees as a retention tool. The majority of sign-on awards have three-year cliff vesting terms and employees must fulfill service requirements in exchange for the right to the awards. Compensation expense is amortized on a straight-line basis from the date of grant over the requisite service period. Employees forfeit unvested shares upon termination of employment and a reversal of the related compensation expense is recorded.

Retention Grants and Inducement Grants are subject to ratable vesting based upon a five-year service requirement and are amortized as compensation expense on a straight-line basis from the grant date over the requisite service period. Employees forfeit unvested retention shares upon termination of employment and a reversal of compensation expense is recorded.

Performance-based restricted stock awards granted in 2008 and 2009 cliff vest upon meeting a specific performance-based metric prior to May 2013. Performance Grants are amortized on a straight-line basis over the period we expect the performance target to be met. The performance condition must be met for the awards to vest and total compensation cost will be recognized only if the performance condition is satisfied. The probability that the performance conditions will be achieved and that the awards will vest is reevaluated each reporting period with changes in actual or estimated outcomes accounted for using a cumulative effect adjustment to compensation expense.

Stock-based compensation granted to our non-employee directors is in the form of unrestricted common shares of Piper Jaffray Companies stock. The stock-based compensation paid to directors is immediately expensed and is included in our results of operations as outside services expense as of the date of grant.

We granted stock options in fiscal years 2004 through 2008. The options were expensed on a straight-line basis over the required service period, based on the estimated fair value of the award on the grant date using a Black-Scholes option-pricing model. This model required management to exercise judgment with respect to certain assumptions, including the expected dividend yield, the expected volatility, and the expected life of the options. As described above pertaining to our Annual Grants of restricted shares, stock options granted to employees were expensed in the calendar year preceding the annual February grant.

Contingencies

We are involved in various pending and potential legal proceedings related to our business, including litigation, arbitration and regulatory proceedings. Some of these matters involve claims for substantial amounts, including claims for punitive and other special damages. We have, after consultation with outside legal counsel and consideration of facts currently known by management, recorded estimated losses in accordance with FASB Accounting Standards Codification Topic 450, “Contingencies,” to the extent that claims are probable of loss and the amount of the loss can be reasonably estimated. The determination of these reserve amounts requires significant

judgment on the part of management. In making these determinations, we consider many factors, including, but not limited to, the loss and damages sought by the plaintiff or claimant, the basis and validity of the claim, the likelihood of a successful defense against the claim, and the potential for, and magnitude of, damages or settlements from such pending and potential litigation and arbitration proceedings, and fines and penalties or orders from regulatory agencies.

Given the uncertainties regarding timing, size, volume and outcome of pending and potential legal proceedings and other factors, the amounts of reserves are difficult to determine and of necessity subject to future revision. Subject to the foregoing, we believe, based on our current knowledge, after appropriate consultation with outside legal counsel and after taking into account our established reserves, that pending litigation, arbitration and regulatory proceedings will be resolved with no material adverse effect on our financial condition. However, if, during any period, a potential adverse contingency should become probable or resolved for an amount in excess of the established reserves, the results of operations in that period could be materially adversely affected.

Income Taxes

We file a consolidated U.S. federal income tax return, which includes all of our qualifying subsidiaries. We also are subject to income tax in various states and municipalities and those foreign jurisdictions in which we operate. Amounts provided for income taxes are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for tax loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income taxes are provided for temporary differences in reporting certain items, principally, amortization of share-based compensation. The realization of deferred tax assets is assessed and a valuation allowance is recorded to the extent that it is more likely than not that any portion of the deferred tax asset will not be realized. We believe that our future taxable profits will be sufficient to recognize our U.S. and Asia subsidiary deferred tax assets. However, if our projections of future taxable profits do not materialize, we may conclude that a valuation allowance is necessary, which would impact our results of operations in that period. Given the underperformance and uncertainties of the Asian markets, we will continue to evaluate the need to establish a valuation allowance for our Hong Kong subsidiary’s $2.3 million deferred tax asset. We have recorded a deferred tax asset valuation allowance of $7.9 million related to U.K. subsidiary net operating loss carry-forwards.

We record deferred tax benefits for future tax deductions expected upon the vesting of share-based compensation. If deductions reported on our tax return for share-based compensation (i.e., the value of the share-based compensation at the time of vesting) exceed the cumulative cost of those instruments recognized for financial reporting (i.e., the grant date fair value of the compensation computed in accordance with ASC 718), we record the excess tax benefit as additional paid-in capital. Conversely, if deductions reported on our tax return for share-based compensation are less than the cumulative cost of those instruments recognized for financial reporting, we offset the deficiency first to any previously recognized excess tax benefits recorded as additional paid-in capital and any remaining deficiency is recorded as income tax expense. As of March 31, 2011, we had $0.5 million of available excess tax benefits within additional paid-in capital. Approximately 1,535,000 shares vested in the first quarter of 2011 at values greater than the grant date fair value resulting in the $0.5 million of excess tax benefits.

We establish reserves for uncertain income tax positions in accordance with FASB Accounting Standards Codification Topic 740, “Income Taxes,” when it is not more likely than not that a certain position or component of a position will be ultimately upheld by the relevant taxing authorities. Significant judgment is required in evaluating uncertain tax positions. Our tax provision and related accruals include the impact of estimates for uncertain tax positions and changes to the reserves that are considered appropriate. To the extent the probable tax outcome of these matters changes, such change in estimate will impact the income tax provision in the period of change and, in turn, our results of operations.

Liquidity, Funding and Capital Resources

Liquidity is of critical importance to us given the nature of our business. Insufficient liquidity resulting from adverse circumstances contributes to, and may be the cause of, financial institution failure. Accordingly, we regularly monitor our liquidity position, including our cash and net capital positions, and we have implemented a liquidity strategy designed to enable our business to continue to operate even under adverse circumstances, although there can be no assurance that our strategy will be successful under all circumstances.

The majority of our tangible assets consist of assets readily convertible into cash. Financial instruments and other inventory positions owned are stated at fair value and are generally readily marketable in most market conditions. Receivables and payables with customers and brokers and dealers usually settle within a few days. As part of our liquidity strategy, we emphasize diversification of funding sources to the extent possible and maximize our lower-cost financing alternatives. Our assets are financed by our cash flows from operations, equity capital, and other funding arrangements. The fluctuations in cash flows from financing activities are directly related to daily operating activities from our various businesses.

The following are financial instruments that are cash and cash equivalents, or are deemed by management to be generally readily convertible into cash, marginable or accessible for liquidity purposes within a relatively short period of time:


	March 31,		December 31,
(Dollars in thousands)	2011		2010
Cash and cash equivalents:
Cash in banks	$	28,242	$	40,679
Money market investments		15,021		9,923

Total cash and cash equivalents		43,263		50,602
Cash and securities segregated (1)		7,006		27,006

	$	50,269	$	77,608


(1)		Consists of deposits in accordance with Rule 15c3-3 of the Securities Exchange Act of 1934, which subjects Piper Jaffray & Co., our U.S. broker dealer subsidiary carrying client accounts, to requirements related to maintaining cash or qualified securities in a segregated reserve account for the exclusive benefit of our clients.

Use of financial instruments for liquidity purposes by our regulated entities is limited by net capital requirements or would curtail many of our revenue producing activities if it reduced our net capital.

Certain market conditions can impact the liquidity of our inventory positions, requiring us to hold larger inventory positions for longer than expected or requiring us to take other actions that may adversely impact our results.

A significant component of our employees’ compensation is paid in annual discretionary incentive compensation. The timing of these incentive compensation payments, which generally are made in February, has a significant impact on our cash position and liquidity.

We currently do not pay cash dividends on our common stock and do not plan to in the foreseeable future. Additionally, we maintain a bank syndicated credit agreement, as described in Note 13 to our consolidated financial statements, and it includes a restrictive covenant that restricts our ability to pay cash dividends.

In 2010, our board of directors authorized the repurchase of up to $75 million in shares of our common stock through September 30, 2012. In the first quarter of 2011, we did not repurchase any shares of our common stock related to this authorization. Based upon prior repurchases, $57.4 million of this authorization remains available as of March 31, 2011.

Funding Sources

Short-term financing

Our day-to-day funding and liquidity is obtained primarily through the use of repurchase agreements, commercial paper issuance, and bank lines of credit, and is typically collateralized by our securities inventory. These funding

sources are critical to our ability to finance and hold inventory, which is a necessary part of our institutional brokerage business. The majority of our inventory is very liquid and is therefore funded by overnight facilities. However, we have established and structured certain funding sources with longer maturities (i.e., our committed line and commercial paper) to mitigate changes in the liquidity of our inventory based on changing market conditions. Our funding sources are also dependent on the types of inventory counterparties are willing to accept as collateral and the number of counterparties available. We currently have a limited number of counterparties that will enter into municipal repurchase agreements. The majority of our bank lines and commerical paper will accept municipal inventory which helps mitigate this municipal repurchase counterparty risk. We also have established arrangements to obtain financing by another broker dealer at the end of each business day related specifically to our convertible inventory. Funding is generally obtained at rates based upon the federal funds rate and/or the London Interbank Offer Rate.

Uncommitted Lines — We use uncommitted lines in the ordinary course of business to fund a portion of our daily operations, and the amount borrowed under our uncommitted lines varies daily based on our funding needs. Our uncommitted secured lines total $275 million with three banks and are dependent on having appropriate collateral, as determined by the bank agreement, to secure an advance under the line. Collateral limitations could reduce the amount of funding available under these secured lines. We also have a $100 million uncommitted unsecured facility with one of these banks. These uncommitted lines are discretionary and are not a commitment by the bank to provide an advance under the line. These lines are subject to approval by the respective bank each time an advance is requested and advances may be denied. We manage our relationships with the banks that provide these uncommitted facilities in order to have appropriate levels of funding for our business. At March 31, 2011, we had $20.0 million in advances against these lines of credit.

Committed Lines — Our committed line is a $250 million revolving secured credit facility. We use this credit facility in the ordinary course of business to fund a portion of our daily operations, and the amount borrowed under the facility varies daily based on our funding needs. Advances under this facility are secured by certain marketable securities. The facility includes a covenant that requires Piper Jaffray & Co., our U.S. broker dealer subsidiary, to maintain a minimum net capital of $150 million, and the unpaid principal amount of all advances under the facility will be due on December 30, 2011. At March 31, 2011, we had no advances against our committed line of credit.

Commercial Paper Program — We issue secured commercial paper to fund a portion of our securities inventories. The maximum amount that may be issued under the program is $300 million, of which $105.2 million was outstanding at March 31, 2011. The commercial paper notes are secured by our securities inventory with maturities on the commercial paper ranging from 28 days to 270 days from the date of issuance.

The following table presents the average balances outstanding for our various short-term funding sources by quarter for 2011 and 2010, respectively.


	Average Balance for the
	Three Months Ended
(Dollars in millions)	March 31, 2011		Dec. 31, 2010		Sept. 30, 2010		June 30, 2010		March 31, 2010
Funding source:
Repurchase agreements	$	253.6	$	259.8	$	278.7	$	342.3	$	92.3
Commercial paper		112.1		106.6		58.8		46.8		31.1
Short-term bank loans		24.7		37.3		6.7		95.1		74.4
Securities lending		-		-		-		9.8		27.7

Total	$	390.4	$	403.7	$	344.2	$	494.0	$	225.5

The average funding in the first quarter of 2011 was down slightly compared with the fourth quarter of 2010. This change is the result of cash inflows generated from earnings and other cash receipts late in the fourth quarter of 2010 and early in the first quarter of 2011 offset by cash payments for incentives and related payroll taxes which occurred later in the first quarter of 2011. Given the timing of these incentive and related tax payments, we expect to see an increase in the average funding balances during the second quarter of 2011.

Three-year bank syndicated credit agreement

On December 29, 2010, we entered into a three-year bank syndicated credit agreement (“Credit Agreement”), comprised of a $100 million amortizing term loan and a $50 million revolving credit facility. SunTrust Bank is the Administrative Agent (“Agent”) for the lenders. The term loan amortizes 10% in year one, 25% in year two and 65% in year three. As of March 31, 2011, $25.0 million was outstanding on the revolving credit facility, and $97.5 million was outstanding on the amortizing term loan.

The Credit Agreement includes customary events of default, including failure to pay principal when due or failure to pay interest within three business days of when due, failure to comply with the covenants in the Credit Agreement and related documents, failure to pay or another event of default under other material indebtedness in an amount exceeding $5 million, bankruptcy or insolvency of the Company or any of our subsidiaries, a change in control of the Company or a failure of Piper Jaffray & Co. to extend, renew or refinance our existing $250 million committed revolving secured credit facility on substantially the same terms as the existing committed facility. If there is any event of default under the Credit Agreement, the Agent may declare the entire principal and any accrued interest on the loans under the Credit Agreement to be due and payable and exercise other customary remedies.

The Credit Agreement includes covenants that, among other things, limit our leverage ratio, require maintenance of certain levels of cash and regulatory net capital, require our asset management segment to achieve minimum earnings before interest, taxes, depreciation and amortization, and impose certain limitations on our ability to make acquisitions and make payments on our capital stock. With respect to the net capital covenant, our U.S. broker dealer subsidiary is required to maintain minimum net capital of $160 million. At March 31, 2011, we were in compliance with all covenants.

Variable rate senior notes

On December 31, 2009, we issued variable rate senior notes (“Notes”) in the amount of $120 million. The initial holders of the Notes were entities advised by Pacific Investment Management Company LLC (“PIMCO”). The unpaid principal and interest amount of the Notes were paid off in full on December 30, 2010 from the proceeds of the Credit Agreement.

Contractual Obligations

Our contractual obligations have not materially changed from those reported in our Annual Report to Shareholders on Form 10-K for the year ended December 31, 2010.

Capital Requirements

As a registered broker dealer and member firm of FINRA, our U.S. broker dealer subsidiary is subject to the uniform net capital rule of the SEC and the net capital rule of FINRA. We have elected to use the alternative method permitted by the uniform net capital rule, which requires that we maintain minimum net capital of the greater of $1.0 million or 2 percent of aggregate debit balances arising from customer transactions, as this is defined in the rule. FINRA may prohibit a member firm from expanding its business or paying dividends if resulting net capital would be less than 5 percent of aggregate debit balances. Advances to affiliates, repayment of subordinated liabilities, dividend payments and other equity withdrawals are subject to certain notification and other provisions of the uniform net capital rules. We expect that these provisions will not impact our ability to meet current and future obligations. We also are subject to certain notification requirements related to withdrawals of excess net capital from our broker dealer subsidiary. At March 31, 2011, our net capital under the SEC’s Uniform Net Capital Rule was $197.7 million, and exceeded the minimum net capital required under the SEC rule by $196.7 million.

Although we operate with a level of net capital substantially greater than the minimum thresholds established by FINRA and the SEC, a substantial reduction of our capital would curtail many of our revenue producing activities.

Piper Jaffray Ltd., our broker dealer subsidiary registered in the United Kingdom, is subject to the capital requirements of the U.K. Financial Services Authority. Each of our Piper Jaffray Asia entities licensed by the Hong Kong Securities and Futures Commission is subject to the liquid capital requirements of the Securities and Futures (Financial Resources) Rule promulgated under the Securities and Futures Ordinance.

Off-Balance Sheet Arrangements

In the ordinary course of business we enter into various types of off-balance sheet arrangements. The following table summarizes our off-balance sheet arrangements at March 31, 2011 and December 31, 2010:


Expiration Per Period at March 31, 2011														Total
													Contractual Amount
	Remainder of						2014-		2016-					March 31,		December 31,
(Dollars in thousands)	2011		2012		2013		2015		2017		Later			2011		2010
Customer matched-book derivative contracts (1)(2)	$	-	$	-	$	50,990	$	182,261	$	153,798	$	6,094,287		$	6,481,336	$	6,505,232
Trading securities derivative contracts (2)		-		-		-		-		-		202,250			202,250		192,250
Credit default swap index contracts (2)		-		-		-		200,000		-		-			200,000		200,000
Foreign currency forward contracts (2)		-		-		-		-		-		-			-		16,645
Private equity and other principal investments		-		-		-		-		-		-			2,541		2,618


(1)		Consists of interest rate swaps. We have minimal market risk related to these matched-book derivative contracts; however, we do have counterparty risk with two major financial institutions, which is mitigated by collateral deposits. In addition, we have a limited number of counterparties (contractual amount of $267.5 million at March 31, 2011) who are not required to post collateral. Based on market movements, the uncollateralized amounts representing the fair value of the derivative contracts could become material, exposing us to the credit risk of these counterparties. At March 31, 2011, we had $17.3 million of credit exposure with these counterparties, including $9.8 million of credit exposure with one counterparty.

(2)		We believe the fair value of these derivative contracts is a more relevant measure of the obligations because we believe the notional or contract amount overstates the expected payout. At March 31, 2011 and December 31, 2010, the net fair value of these derivative contracts approximated an asset of $18.5 million and $29.3 million, respectively.

Derivatives

Derivatives’ notional contract amounts are not reflected as assets or liabilities on our consolidated statements of financial condition. Rather, the market value, or fair value, of the derivative transactions are reported on the consolidated statements of financial condition as assets or liabilities in financial instruments and other inventory positions owned and financial instruments and other inventory positions sold, but not yet purchased, as applicable. Derivatives are presented on a net basis by counterparty when a legal right of offset exists and on a net basis by cross product when applicable provisions are stated in a master netting agreement.

We enter into derivative contracts in a principal capacity as a dealer to satisfy the financial needs of clients. We also use derivative products to hedge the interest rate and market value risks associated with our security positions. Our interest rate hedging strategies may not work in all market environments and as a result may not be effective in mitigating interest rate risk. For a complete discussion of our activities related to derivative products, see Note 5, “Financial Instruments and Other Inventory Positions Owned and Financial Instruments and Other Inventory Positions Sold, but Not Yet Purchased,” in the notes to our consolidated financial statements.

Loan Commitments

We may commit to bridge loan financing for our clients or make commitments to underwrite corporate debt. We had no loan commitments outstanding at March 31, 2011.

Private Equity and Other Principal Investments

As of March 31, 2011, we have investments in various entities, typically partnerships or limited liability companies, established for the purpose of investing in equity and debt securities of public and private companies. We commit capital or act as the managing partner of these entities. Some of these entities are deemed to be variable interest entities. For a complete discussion of our activities related to these types of entities, see Note 7, “Variable Interest Entities,” to our consolidated financial statements.

We have committed capital to certain entities and these commitments have no specified call dates. We had $2.5 million of commitments outstanding at March 31, 2011.

Other Off-Balance Sheet Exposure

Our other types of off-balance sheet arrangements include contractual commitments. For a discussion of our activities related to these off-balance sheet arrangements, see Note 18, “Contingencies and Commitments,” to our consolidated financial statements included in our Annual Report to Shareholders on Form 10-K for the year ended December 31, 2010.

Enterprise Risk Management

Risk is an inherent part of our business. In the course of conducting business operations, we are exposed to a variety of risks. Market risk, liquidity risk, credit risk, operational risk, legal, regulatory and compliance risk, and reputational risk are the principal risks we face in operating our business. We seek to identify, assess and monitor each risk in accordance with defined policies and procedures. The extent to which we properly identify and effectively manage each of these risks is critical to our financial condition and profitability.

With respect to market risk and credit risk, the cornerstone of our risk management process is daily communication among traders, trading department management and senior management concerning our inventory positions and overall risk profile. Our risk management functions supplement this communication process by providing their independent perspectives on our market and credit risk profile on a daily basis. The broader goals of our risk management functions are to understand the risk profile of each trading area, to consolidate risk monitoring company-wide, to assist in implementing effective hedging strategies, to articulate large trading or position risks to senior management, and to ensure accurate mark-to-market pricing.

In addition to supporting daily risk management processes on the trading desks, our risk management functions support our financial risk committee. This committee oversees risk management practices, including defining acceptable risk tolerances and approving risk management policies.

Risk management techniques, processes and strategies may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk, and any risk management failures could expose us to material unanticipated losses.

Market Risk

Market risk represents the risk of financial volatility that may result from the change in value of a financial instrument due to fluctuations in its market price. Our exposure to market risk is directly related to our role as a financial intermediary for our clients, to our market-making activities and our proprietary activities. Market risks are inherent to both cash and derivative financial instruments. The scope of our market risk management policies and procedures includes all market-sensitive financial instruments.

Our different types of market risk include:

Interest Rate Risk — Interest rate risk represents the potential volatility from changes in market interest rates. We are exposed to interest rate risk arising from changes in the level and volatility of interest rates, changes in the shape of the yield curve, changes in credit spreads, and the rate of prepayments. Interest rate risk is managed through the use of appropriate hedging in U.S. government securities, agency securities, mortgage-backed securities, corporate debt securities, interest rate swaps, options, futures and forward contracts. We utilize interest rate swap contracts to hedge a portion of our fixed income inventory and to hedge MMD rate lock agreements. Our interest rate hedging strategies may not work in all market environments and as a result may not be effective in mitigating interest rate risk. These interest rate swap contracts are recorded at fair value with the changes in fair value recognized in earnings.

Equity Price Risk — Equity price risk represents the potential loss in value due to adverse changes in the level or volatility of equity prices. We are exposed to equity price risk through our trading activities in the U.S. market on both listed and over-the-counter equity markets. We attempt to reduce the risk of loss inherent in our market-making and in our inventory of equity securities by establishing limits on the notional level of our inventory and by managing net position levels within those limits.

Currency Risk — Currency risk arises from the possibility that fluctuations in foreign exchange rates will impact the value of financial instruments. A portion of our business is conducted in currencies other than the U.S. dollar, and changes in foreign exchange rates relative to the U.S. dollar can therefore affect the value of non-U.S. dollar net assets, revenues and expenses. A change in the foreign currency rates could create either a foreign currency transaction gain/loss (recorded in our consolidated statements of operations) or a foreign currency translation adjustment to the shareholders’ equity section of our consolidated statements of financial condition.

Value-at-Risk

Value-at-Risk (“VaR”) is the potential loss in value of our trading positions due to adverse market movements over a defined time horizon with a specified confidence level. We perform a daily VaR analysis on substantially all of our trading positions, including fixed income, equities, convertible bonds, exchange traded options, and all associated economic hedges. These positions encompass both customer-related activities and proprietary investments. We use a VaR model because it provides a common metric for assessing market risk across business lines and products. Changes in VaR between reporting periods are generally due to changes in levels of risk exposure, volatilities and/or correlations among asset classes and individual securities.

We use a Monte Carlo simulation methodology for VaR calculations. We believe this methodology provides VaR results that properly reflect the risk profile of all our instruments, including those that contain optionality, and also accurately models correlation movements among all of our asset classes. In addition, it provides improved tail results as there are no assumptions of distribution, and can provide additional insight for scenario shock analysis.

Model-based VaR derived from simulation has inherent limitations including: reliance on historical data to predict future market risk; VaR calculated using a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or offset with hedges within one day; and published VaR results reflect past trading positions while future risk depends on future positions.

The modeling of the market risk characteristics of our trading positions involves a number of assumptions and approximations. While we believe that these assumptions and approximations are reasonable, different assumptions and approximations could produce materially different VaR estimates.

The following table quantifies the model-based VaR simulated for each component of market risk for the periods presented computed using the past 250 days of historical data. When calculating VaR we use a 95 percent confidence level and a one-day time horizon. This means that, over time, there is a 1 in 20 chance that daily trading net revenues will fall below the expected daily trading net revenues by an amount at least as large as the reported VaR. Shortfalls on a single day can exceed reported VaR by significant amounts. Shortfalls can also accumulate over a longer time horizon, such as a number of consecutive trading days. Therefore, there can be no assurance that actual losses occurring on any given day arising from changes in market conditions will not exceed the VaR amounts shown below or that such losses will not occur more than once in a 20-day trading period.


	March 31,			December 31,
(Dollars in thousands)	2011			2010
Interest Rate Risk	$	1,312		$	810
Equity Price Risk		1,062			40
Diversification Effect (1)		(872	)		(47	)

Total Value-at-Risk	$	1,502		$	803


(1)		Equals the difference between total VaR and the sum of the VaRs for the two risk categories. This effect arises because the two market risk categories are not perfectly correlated.

We view average VaR over a period of time as more representative of trends in the business than VaR at any single point in time. The table below illustrates the daily high, low and average value-at-risk calculated for each component of market risk during the three months ended March 31, 2011 and the year ended December 31, 2010, respectively.

For the Three Months Ended March 31, 2011


(Dollars in thousands)	High		Low		Average
Interest Rate Risk	$	1,815	$	648	$	1,077
Equity Price Risk		1,601		53		466
Diversification Effect (1)						(372	)
Total Value-at-Risk	$	1,777	$	700	$	1,171

For the Year Ended December 31, 2010


(Dollars in thousands)	High		Low		Average
Interest Rate Risk	$	4,359	$	178	$	1,451
Equity Price Risk		3,414		27		220
Diversification Effect (1)						(238	)
Total Value-at-Risk	$	4,227	$	165	$	1,433


(1)		Equals the difference between total VaR and the sum of the VaRs for the two risk categories. This effect arises because the two market risk categories are not perfectly correlated. Because high and low VaR numbers for these risk categories may have occurred on different days, high and low numbers for diversification benefit would not be meaningful.

Trading losses incurred on a single day exceeded our one-day VaR on two occasions during the first three months of 2011.

The aggregate VaR as of March 31, 2011 was higher compared to levels reported as of December 31, 2010. Although inventory levels are similar to those reported at the end of 2010, its current makeup is weighted towards assets with longer duration, more basis risk and higher sensitivity to volatility which results in a higher VaR.

In addition to VaR, we also employ additional measures to monitor and manage market risk exposure including the following: net market position, duration exposure, option sensitivities, and inventory turnover. All metrics are aggregated by asset concentration and are used for monitoring limits and exception approvals.

Liquidity Risk

Market risk can be exacerbated in times of trading illiquidity when market participants refrain from transacting in normal quantities and/or at normal bid-offer spreads. Depending on the specific security, the structure of the financial product, and/or overall market conditions, we may be forced to hold a security for substantially longer than we had planned. Our inventory positions subject us to potential financial losses from the reduction in value of illiquid positions.

We are also exposed to liquidity risk in our day-to-day funding activities. We have a relatively low leverage ratio of 2.35 as of March 31, 2011. We calculate our leverage ratio by dividing total assets by total shareholders’ equity. We manage liquidity risk by diversifying our funding sources across products and among individual counterparties within those products. For example, our treasury department actively manages the use of our committed bank line, repurchase agreements, securities lending arrangements, commercial paper issuance and secured and unsecured bank borrowings each day depending on pricing, availability of funding, available collateral and lending parameters from any one of these sources.

In addition to managing our capital and funding, the treasury department oversees the management of net interest income risk and the overall use of our capital, funding, and balance sheet.

We currently act as the remarketing agent for approximately $5.3 billion of variable rate demand notes, all of which have a financial institution providing a liquidity guarantee. At certain times, demand from buyers of variable rate demand notes is less than the supply generated by sellers of these instruments. In times of supply and demand imbalance, we may (but are not obligated to) facilitate liquidity by purchasing variable rate demand notes from sellers for our own account. Our liquidity risk related to variable rate demand notes is ultimately mitigated by our ability to tender these securities back to the financial institution providing the liquidity guarantee.

Credit Risk

Credit risk in our business arises from potential non-performance by counterparties, customers, borrowers or issuers of securities we hold in our trading inventory. The global credit crisis also has created increased credit risk, particularly counterparty risk, as the interconnectedness of the financial markets has caused market participants to be impacted by systemic pressure, or contagion, that results from the failure or potential failure of market participants.

We have concentrated counterparty credit exposure with six non-publicly rated entities totaling $17.3 million at March 31, 2011. This counterparty credit exposure is part of our derivative program, consisting primarily of interest rate swaps. One derivative counterparty represents 56.6 percent, or $9.8 million, of this exposure. Credit exposure associated with our derivative counterparties is driven by uncollateralized market movements in the fair value of the interest rate swap contracts and is monitored regularly by our financial risk committee.

We are exposed to credit risk in our role as a trading counterparty to dealers and customers, as a holder of securities and as a member of exchanges and clearing organizations. Our client activities involve the execution, settlement and financing of various transactions. Client activities are transacted on a delivery versus payment, cash or margin basis. Our credit exposure to institutional client business is mitigated by the use of industry-standard delivery versus payment through depositories and clearing banks.

Credit exposure associated with our customer margin accounts in the U.S. and Hong Kong is monitored daily. Our risk management functions have created credit risk policies establishing appropriate credit limits and collateralization thresholds for our customers utilizing margin lending.

Credit exposure associated with our merchant banking debt investments is monitored regularly by our financial risk committee. Merchant banking debt investments that have been funded are recorded in other assets at amortized cost on the consolidated statements of financial condition. At March 31, 2011, we had one funded merchant banking debt investment totaling $6.6 million.

Our risk management functions review risk associated with institutional counterparties with whom we hold repurchase and resale agreement facilities, stock borrow or loan facilities, derivatives, TBAs and other documented institutional counterparty agreements that may give rise to credit exposure. Counterparty levels are established relative to the level of counterparty ratings and potential levels of activity.

We are subject to credit concentration risk if we hold large individual securities positions, execute large transactions with individual counterparties or groups of related counterparties, extend large loans to individual borrowers or make substantial underwriting commitments. Concentration risk can occur by industry, geographic area or type of client. Potential credit concentration risk is carefully monitored and is managed through the use of policies and limits.

We also are exposed to the risk of loss related to changes in the credit spreads of debt instruments. Credit spread risk arises from potential changes in an issuer’s credit rating or the market’s perception of the issuer’s credit worthiness. We use credit default swap index contracts to mitigate this risk.

Operational Risk

Operational risk refers to the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. We rely on the ability of our employees, our internal systems and processes and systems at computer centers operated by third parties to process a large number of transactions. In the event of a breakdown or improper operation of our systems or processes or improper action by our employees or third-party vendors, we could suffer financial loss, regulatory sanctions and damage to our reputation. We have business continuity plans in place that we believe will cover critical processes on a company-wide basis, and redundancies are built into our systems as we have deemed appropriate. These control mechanisms attempt to ensure that operations policies and procedures are being followed and that our various businesses are operating within established corporate policies and limits.

Legal, Regulatory and Compliance Risk

Legal, regulatory and compliance risk includes the risk of non-compliance with applicable legal and regulatory requirements and the risk that a counterparty’s performance obligations will be unenforceable. We are generally subject to extensive regulation in the various jurisdictions in which we conduct our business. We have established procedures that are designed to ensure compliance with applicable statutory and regulatory requirements, including, but not limited to, those related to regulatory net capital requirements, sales and trading practices, use and safekeeping of customer funds and securities, credit extension, money-laundering, privacy and recordkeeping.

We have established internal policies relating to ethics and business conduct, and compliance with applicable legal and regulatory requirements, as well as training and other procedures designed to ensure that these policies are followed.

Reputation and Other Risk

We recognize that maintaining our reputation among clients, investors, regulators and the general public is critical. Maintaining our reputation depends on a large number of factors, including the conduct of our business activities and the types of clients and counterparties with whom we conduct business. We seek to maintain our reputation by conducting our business activities in accordance with high ethical standards and performing appropriate reviews of clients and counterparties.

Effects of Inflation

Because our assets are liquid in nature, they are not significantly affected by inflation. However, the rate of inflation affects our expenses, such as employee compensation, office space leasing costs and communications charges, which may not be readily recoverable in the price of services we offer to our clients. To the extent inflation results in rising interest rates and has other adverse effects upon the securities markets, it may adversely affect our financial position and results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The information under the caption “Enterprise Risk Management” in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in this Form 10-Q is incorporated herein by reference.

ITEM 4. CONTROLS AND PROCEDURES.

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (b) accumulated and communicated to our management, including our principal executive officer and principal financial officer to allow timely decisions regarding disclosure.

During the first quarter of the fiscal year ending December 31, 2011, there was no change in our system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

The discussion of our business and operations should be read together with the legal proceedings contained in Part I, Item 3 “Legal Proceedings” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

ITEM 1A. RISK FACTORS.

The discussion of our business and operations should be read together with the risk factors contained in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 filed with the SEC, as updated in our subsequent reports on Form 10-Q filed with the SEC. These risk factors describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

The table below sets forth the information with respect to purchases made by or on behalf of Piper Jaffray Companies or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of our common stock during the quarter ended March 31, 2011.


					Total Number of
					Shares Purchased as		Approximate Dollar Value
	Total Number				Part of Publicly		of Shares that May Yet Be
	of Shares		Average Price Paid		Announced Plans or		Purchased Under the Plans
Period	Purchased		per Share		Programs		or Programs (1)
Month #1 (January 1, 2011 to January 31, 2011)		18,256	$	43.50		0	$ 57 million
Month #2 (February 1, 2011 to February 28, 2011)		409,951	$	42.34		0	$ 57 million
Month #3 (March 1, 2011 to March 31, 2011)		11,605	$	40.60		0	$ 57 million

Total		439,812	$	42.34		0	$ 57 million


(1)		On July 28, 2010, we announced that our board of directors had authorized the repurchase of up to $75 million of common stock through September 30, 2012.

In addition, a third-party trustee makes open-market purchases of our common stock from time to time pursuant to the Piper Jaffray Companies Retirement Plan, under which participating employees may allocate assets to a company stock fund.

ITEM 6. EXHIBITS.


Exhibit		Method of
Number	Description	Filing

31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.	Filed herewith

31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.	Filed herewith

32.1	Certifications furnished pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed herewith

101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Financial Condition as of March 31, 2011 and December 31, 2010, (ii) the Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010, (iii) the Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010 and (iv) the notes to the Consolidated Financial Statements, tagged as blocks of text.	Filed herewith

SIGNATURES

Pursuant to the requirements 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 on May 5, 2011.


	PIPER JAFFRAY COMPANIES
	By	/s/ Andrew S. Duff
	Its	Chairman and Chief Executive Officer

	By	/s/ Debbra L. Schoneman
	Its	Chief Financial Officer

Exhibit Index


Exhibit		Method of
Number	Description	Filing

31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.	Filed herewith

31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.	Filed herewith

32.1	Certifications furnished pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed herewith

101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Financial Condition as of March 31, 2011 and December 31, 2010, (ii) the Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010, (iii) the Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010 and (iv) the notes to the Consolidated Financial Statements, tagged as blocks of text.	Filed herewith