(Bloomberg) — Shares of B. Riley Financial Inc. lost as much as half their value due to a new round of writedowns and a growing US investigation into whether this gave investors an accurate picture of the country’s financial health.
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The U.S. Securities and Exchange Commission is assessing whether Los Angeles-based B. Riley has adequately disclosed the risks associated with some of its assets, people familiar with the matter said. The agency is also seeking information about interactions between founder Bryant Riley and longtime business partner Brian Kahn, the former CEO of Franchise Group Inc., the people said. Franchise Group, or FRG, is one of B. Riley’s larger investment holding companies.
The investigation includes an investigation into possible improper trading by other insiders, said the people, who requested anonymity because the probe has not been announced by the agency. Another topic regulators have asked about is the intercompany movement of claims on cash-strapped retail customers, whose repayments could be questionable, the people said.
Shares of B. Riley fell 47% to $9.01 at 10:25 a.m. in New York, having fallen more than 52% on the session.
The SEC’s overlapping civil investigations, involving attorneys from Los Angeles, Washington and Philadelphia, are joining a federal criminal investigation in New Jersey. Prosecutors are investigating the 2020 collapse of an investment fund, Prophecy Asset Management, where Kahn managed most of his assets.
Prophecy investors who lost money have questioned in a lawsuit whether Kahn improperly used Prophecy proceeds to gain control of BRD for himself. A co-founder of that fund pleaded guilty in November in a $294 million fraud case and is cooperating with prosecutors, who labeled Kahn an unindicted co-conspirator, Bloomberg previously reported.
Received summons
Bryant Riley told investors during a conference call on Monday that he and the company received subpoenas from the SEC in July, which focused primarily on B. Riley’s dealings with Kahn.
“We are responding to the subpoenas and are fully cooperating with the SEC,” Bryant Riley said. “We are confident that the SEC will reach the same conclusion as our own internal investigation, with the assistance of two separate law firms – that we had no involvement in or knowledge of any alleged misconduct involving Brian Kahn or his affiliates.”
Representatives for Kahn did not respond to messages seeking comment. Representatives for the SEC and the U.S. Attorney’s Office in New Jersey declined to comment. Kahn, Riley and their companies have not been charged with anything by authorities, and the US investigations could end without action against any of them.
“At no time during my prior business relationship with Prophecy did I know that Prophecy or its principals would defraud their investors, nor did I conspire to commit any fraud,” Kahn said in a November statement.
B. Riley on Monday suspended its dividend and warned of losses as it wrote down part of its stake in BRD and a related loan receivable. The company expects a non-cash impairment charge of approximately $330 million to $370 million, according to a company statement.
The SEC investigation continues as B. Riley tries to recover from two annual losses and struggles to correct control deficiencies identified by auditors this year. Short sellers have targeted the shares, which have fallen more than 60% in the year after B. Riley Kahn helped orchestrate a management-led buyout of FRG.
B. Riley’s finances are complicated by a series of loans, advances and other asset transfers between the company, BRD and Kahn.
FRG’s debt is at deeply distressed levels, and the company has hired advisers to help find ways to ease the burden. The company has also been hit by the demise of Conn’s Inc., another furniture chain that went bankrupt within months after buying rival WS Badcock of FRG.
Conn’s owed B. Riley at least $93 million on a loan when it filed for court protection, company filings show. B. Riley had said it expects to be repaid in full. Meanwhile, FRG has an interest in Conn’s preferred shares, which it received in payment for the sale of Badcock. The stake is convertible into shares of Conn’s common stock, but those shares have since collapsed in bankruptcy, reducing the value of FRG’s assets.
B. Riley, in turn, owns almost a third of BRD’s share capital. B. Riley has downplayed the potential impact of Conn’s accident, saying that FRG’s stake was only a small portion of the company’s total assets.
But S&P Global Ratings said in a July 24 credit downgrade that Conn’s bankruptcy could lead to FRG violating the terms of its own loan. BRD’s capital structure “appears unsustainable,” S&P said in its analysis, and the post-bankruptcy recovery scenario showed little or nothing for second-term lenders – which typically means shareholders are left empty-handed.
–With help from Donal Griffin.
(Updates with share response, starting in first paragraph)
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