The SEC carried out interviews in recent months about B. Riley and its relationship with Brian Kahn, an unidentified co-conspirator in a US Department of Justice criminal case. — Reuters
WASHINGTON: US authorities are investigating B. Riley Financial Inc’s deals with a key client who was linked to a securities fraud, and the use of his assets to help the investment bank obtain a loan from Nomura Holdings Inc, according to people familiar with the matter.
The US Securities and Exchange Commission (SEC) carried out interviews in recent months about B. Riley and its relationship with Brian Kahn, the people said, requesting anonymity as details aren’t public.
Kahn is an unidentified co-conspirator in a US Department of Justice criminal case prompted by the 2020 demise of the Prophecy Asset Management hedge fund, Bloomberg News previously reported.
Officials have been scrutinising how Kahn led a buyout of a retail business called Franchise Group Inc in a deal arranged last year by B. Riley.
Nomura partly financed the transaction, with some of Kahn’s assets pledged as collateral, according to the people and documents reviewed by Bloomberg.
Concern about B. Riley’s relationship with Kahn has helped send the Los Angeles-based firm’s shares tumbling, along with losses and writedowns on some of its investments, and the stock has attracted large bets by so-called short-sellers wagering on further declines.
The brewing controversy also touches on Nomura, one of B. Riley’s biggest lenders, which has been seeking to repair its own reputation for risk management after losing almost US$3bil in 2021 amid the collapse of Archegos Capital Management.
The stock fell as much as 10% Monday, finishing down 2.48% in New York.
By one measure, B. Riley is among the most shorted shares in the global financial services sector, according to a Jan 16 report from S&P Global Market Intelligence. A spokesperson for the SEC declined to comment. The probe is in its early stages. Scrutiny by the agency doesn’t necessarily mean anyone has engaged in any wrongdoing or that legal action will result, and Nomura isn’t the focus of the probe.
“We have not received anything from the SEC on this matter and to the extent the SEC makes an inquiry, we would fully cooperate as we have done in the past on all regulatory inquiries,” a spokesperson for B. Riley said in an emailed statement.
“We would welcome an investigation into the outrageous tactics the short sellers have pursued to destroy B. Riley, including the coordinated options trading with zero disclosure obligations,” the statement said.
“The short sellers continue to harass, intimidate, and insult employees and everyone associated with B. Riley, resorting to lies and crude remarks so they can personally profit.”
A Nomura representative said the bank declined to comment.
Mired in conspiracy
B. Riley told shareholders on Nov 9 in its quarterly filing with the SEC that the firm has enough cash and other sources of liquidity to meet its needs. Kahn and his attorney didn’t respond to messages.
“At no time during my former business relationship with Prophecy did I know that Prophecy or its principals were allegedly defrauding their investors, nor did I conspire in any fraud,” Kahn said in a November statement.
“Like many other investors, my relationship with Prophecy was costly, including economically, and I ceased doing business with Prophecy several years ago. In no way, shape or form has this previous relationship impacted Franchise Group.”
Investigators from the SEC’s Los Angeles office have also sought information about bebe stores inc, a women’s clothing chain that B. Riley controls and that also had dealings with Kahn, one of the people said.
Representatives for bebe stores didn’t respond to a request for comment.
B. Riley, founded by chief executive officer Bryant Riley, traces its roots to 1997 as a boutique stock-picking firm focused on smaller companies.
It now offers a birth-to-death business model for smaller publicly traded clients, including stock and bond offerings.
The controversy stems from Kahn’s status as a longstanding client of B. Riley, his alleged role in the downfall of Prophecy Asset Management, and his subsequent alliance with B. Riley to acquire Franchise Group in a leveraged buyout.
Prophecy, an investment fund co-owned by John Hughes, strayed from its advertised strategy of spreading funds around to a diverse group of managers and instead handed almost all of its investors’ money to entities controlled by one adviser, according to court documents filed by prosecutors and the SEC.
The adviser, described as a co-conspirator by prosecutors, proceeded to run up losses over time of about US$290mil that wiped out Prophecy.
The adviser wasn’t identified by name in court documents and SEC filings, but a person familiar with the matter said that person was Kahn, Bloomberg reported in November.
Hughes has pleaded guilty to conspiracy to commit securities fraud and could be sentenced to as much as five years in prison. Kahn has not been charged and denies any wrongdoing related to Prophecy.
Allegations in that case align with those in a separate 2020 civil lawsuit filed in New York by a group of Prophecy investors who named Kahn and others as defendants.
The investors alleged Kahn and his co-defendants helped to swindle them out of tens of millions of dollars and that Kahn then used more than US$100mil of proceeds to amass a controlling stake for himself in Franchise Group.
The lawsuit, filed in federal court in New York, was referred to arbitration and dismissed in 2022. It’s not clear from court records whether there was a settlement or whether Kahn or his co-defendants paid any money. — Bloomberg
