The federal government has expanded its investigation into financial misconduct at B. Riley & Co., sources told The Washington Post, even as the struggling Wall Street company suspended its dividend and issued a profit warning on Monday and its stock price fell more than 50%.
Short sellers continued to provide information about B. Riley to the Securities and Exchange Commission in June and July, according to emails and texts reviewed by The Washington Post, and the SEC has requested additional documents in its ongoing investigation.
SEC investigators are interested in loans that B. Riley may have guaranteed to his former business partner, Brian Kahn, who resigned in January as CEO of Franchise Group, which owns The Vitamin Shoppe and Sylvan Learnings tutoring centers, a source with direct knowledge of the matter said.
Khan resigned following reports that he had ties to Prophecy Asset Management, an investment firm that collapsed in March 2020. Prosecutors said the firm concealed Khan’s trading losses. Khan has not been charged and has denied any wrongdoing.
B. Riley said its second-quarter results were hurt by a write-down of its Franchise Group shares, which it blamed in part on weak consumer spending. The company has suspended its dividend and expects a second-quarter loss of $14 to $15 a share.
During a conference call with investors Monday morning, B. Riley co-CEO Bryant Reilly confirmed that the SEC investigation is ongoing. He was speaking during an investor call on Monday. Bloomberg article The SEC said it had expanded its investigation into B. Riley.
Bloomberg reported that the SEC is investigating whether B. Riley accurately disclosed the risks of the Franchise Group loans and possible improper insider trading, and that the SEC is also looking at communications between Riley and Kahn.
“Our company and I received a subpoena from the SEC in July,” Reilly said. “We are cooperating fully.”
Earlier this year, B. Reilly hired the law firm Winston & Strawn to investigate his ties to Khan. The legal form is over B. Reilly had no involvement in, and was not aware of, any of Khan’s wrongdoings.
B. Riley shares fell 52% to close at $8.15 on Monday.
Prophecy was supposed to invest in a variety of asset management firms, but instead invested primarily in one company, believed to be Khan’s Vintage Capital, and reportedly collapsed after losing all of its funds, approximately $300 million.
Prophecy co-founder John Hughes pleaded guilty to conspiring to commit securities fraud in 2023, and his sentence was recently postponed to Feb. 5, 2025, according to court records.
There is speculation that he may be cooperating with prosecutors.
“Hughes actively misled clients into believing they were investing responsibly by placing their money in low-risk funds,” said Special Agent in Charge Richard Langham of the FBI’s Philadelphia division. This was stated in a press release on November 2nd.
“As these lies continued and his losses mounted, he engineered a cover-up to hide his staggering fraud.”
The SEC declined to comment, and Khan did not respond to a request for comment.
Khan, meanwhile, claims he was also a victim.
“During my previous business relationship with Prophecy, I never had any knowledge that Prophecy or its representatives were allegedly defrauding investors, nor was I complicit in any fraud.” Khan said in a statement to Reuters in November..
Khan allegedly invested much of Prophecy’s funds in buying shares in Franchise Group before leading the takeover of the company, which was backed by B. Riley.
B. Riley backed Khan’s $2.6 million buyout in 2023. It also includes lending $201 million to Vintage Capital, secured by Franchise Group’s shares.
“We are confident that the SEC will reach the same conclusion in our investigation that it was unaware of Mr. Khan’s alleged fraud,” Reilly said on a conference call Monday morning.
B. Riley has close ties to Khan and backed him with equity and debt when his firm, Vintage Capital, closed a $1.4 billion deal to buy Rent-A-Center in 2018 but the deal later fell apart.
B. Riley is a broker-dealer that invests in and lends to small and medium-sized businesses. The firm is also known for liquidating assets. It had $26 billion in assets under management as of March 31, according to public filings.
The Los Angeles-based firm was on a roll a few years ago when it helped save struggling companies like AMC Entertainment from bankruptcy. B. Reilly excelled at raising capital from small investors rather than from institutional investors.
Now B. Riley is in financial jeopardy due to a loan from a franchise group.
Credit rating agency Moody’s on July 22 downgraded Franchise Group’s corporate rating to Caa1 from B3, meaning the company is at very high risk of defaulting on its debt.
B. Riley also lent about $100 million to furniture retailer Conn’s, which filed for bankruptcy on July 23, to buy the franchise group’s brand WS Badcock.
Short sellers have made B. Riley a favorite because they believe the company will go bankrupt.
