by Separately, Buddy Mac to sell 9 Missouri stores to National TV & Sales
B. Riley has been a busy bee since the calendar’s rollover. The company re-branded as BRC Group Holdings, (finally) filed its third-quarter 10Q for 2025, and on Wednesday sued Brian Kahn, Kahn’s wife and Franchise Group’s former law firm alleging a fraud scheme that BRC Group claims cost it $735 million in loan write-offs and lost investment.
Kahn is the former CEO of Franchise Group. He pleaded guilty on Dec. 10 to conspiracy to commit securities fraud relating to hedge fund Prophecy Asset Management, for which Kahn was a sub-adviser. He faces up to five years imprisonment.
That $294 million fraud scheme at Prophecy is directly connected to FRG, according to BRC Group’s complaint filed with the Supreme Court of New York County in Manhattan. The connection is principally through the fabrication of $225 million in preferred stock certificates from Buddy’s Newco, an FRG subsidiary and the holdco for Buddy’s Home Furnishings, the complaint states. BRC Group alleges that Willkie, Farr & Gallagher knew the counterfeit securities did not exist because the firm represented Buddy’s in its 2019 merger with Liberty Tax, the company that became FRG. At various times, Willkie also represented FRG, Kahn and Riley.
When Prophecy collapsed in 2020 after logging losses exceeding $350 million, investors sued. Kahn settled with these Prophecy investors in June 2022, agreeing to transfer 2.5 million FRG shares to a trust and to execute promissory notes totaling over $290 million. By February 2023, Kahn had defaulted on more than $30 million owed to this trust, according to the DOJ’s charges against Kahn brought in November.
In January 2023, the SEC subpoenaed FRG seeking records about the Buddy’s stock. Willkie represented FRG in responding, implicitly confirming that no such stock existed, BRC Group’s 51-page complaint asserts. On June 5, 2023, or 78 days before B. Riley helped Kahn and his management team take FRG private, the DOJ issued a grand jury subpoena targeting Kahn’s role in the Prophecy fraud. Again, Willkie represented FRG in responding to that subpoena. The complaint points out that neither subpoena was disclosed to B. Riley or to FRG’s full board of directors, which included BRC’s chairman, Bryant Riley, until March 2020.
(The SEC has been investigating Riley and BRC Group concerning their dealings with FRG, according to the SEC’s own filings in January and June of last year. Specifically, the SEC is interested in Riley’s pledge of B. Riley shares as collateral for a personal loan to Kahn and FRG, the filings show.)
So much money
At the time of the $2.8 billion take-private deal, Kahn owed more than $200 million to B. Riley and its affiliates while facing hundreds of millions in obligations to the Prophecy settlement trust. In addition to the loans extended to Kahn, B. Riley agreed to provide up to $560 million in equity financing, contingent on representations in the merger agreement to ensure that FRG had disclosed all SEC correspondence, reported any management fraud to auditors, and faced no material legal proceedings, the complaint describes.
Claims of Willkie’s misconduct assert that while simultaneously representing B. Riley in unrelated litigation, the firm also:
+ Drafted transaction documents for Kahn containing representations it knew were false.
+ Represented FRG in responding to both government subpoenas.
+ Negotiated with the Prophecy settlement trustee to obtain consent for the share rollover.
+ Failed to disclose that Kahn lacked authority to roll over 2.5 million shares controlled by the trust.
+Failed to inform B. Riley of the criminal investigation despite owing B. Riley fiduciary duties as also its counsel.
Three months after the take-private deal closed, Prophecy co-conspirator John Hughes pleaded guilty to securities fraud conspiracy, which served also to expose Kahn’s role, according to the BRC Group’s claim. This revelation can reasonably be tied to the subsequent demise of FRG, culminating in Chapter 11 in November 2024 that rendered worthless both B. Riley’s $484 million equity investment and the collateral securing a $200 million loan to Kahn’s entity, Vintage Capital Management.
BRC Group also links increased borrowing costs, lost relationships with brokers, employee departures, millions in legal and audit fees, and heightened regulatory scrutiny as results of the alleged FRG fraud.
Specifically, the complaint asserts six causes of action: common law fraud and fraudulent inducement against Kahn; aiding and abetting fraud against Willkie; civil conspiracy against both defendants; breach of fiduciary duty against Willkie; and breach of contract against Kahn and his wife, Lauren Kahn, regarding their personal guaranty of a Vintage Capital loan.
BRC Group, et al seek compensatory damages exceeding $735 million, punitive damages, refund of Willkie’s fees and recovery under the loan guaranty.
Indigent?
Regardless of the outcome of the case, it’s unlikely BRC Group will ever see any funds returned, at least by Kahn. He claimed to be “financially unable to employ counsel” in the DOJ action, asking the Trenton, New Jersey, court for a court-appointed attorney, according to court records. (Kahn also sold his Florida home for $11.1 million just one week prior to the DOJ hearing, according to Realtor.com, so who knows?)
BRC Group’s lawsuit was included in its most recent 8K filed with the SEC, listing the plaintiffs, in addition to itself, as B. Riley Principal Investments, BRF Finance and B. Riley Commercial Capital.
FRG has proven to be the gift that keeps on giving, especially for attorneys from coast to coast. Over the holiday break, we learned that BRC Group and its chairman, Bryant Riley, will have to defend against claims that they misled investors regarding the very same risky loans to Kahn, including loans the investment bank backed in the take-private deal.
The former investors bringing the class action lawsuit against BRC Group and Riley in California court have “sufficiently alleged” that the defendants acted with deliberate recklessness to sustain their securities fraud claims, according to the judge in the case, Sherilyn Peace Garnett, in ruling last month that the suit can go forward.
There is some good news for BRC Group, however. The company saw its Nasdaq-listed stock surge nearly 40% about 10 days ago on the heels of its third-quarter earnings report. This latest 8K shows net income of $89 million for the quarter on revenue of $278 million, which is a $367 million turnaround from the net loss of $286 million for the same quarter in 2024. On a per-share basis, BRC Group showed a profit of $2.91.
The filing means that BRC Group can remain listed on the Nasdaq, which had issued the company delinquency notices.
‘Your check, sir’
There is still a hole for BRC Group to dig out from, because total debt stood at $1.4 billion, while net debt totaled $703 million. The company reports a reduction in net debt in the quarter by over $120 million, achieved through bond exchanges and investment asset appreciation.
Over the last 18 months or so, BRC Group has negotiated bond exchanges with institutional investors, partnered with investment firm Oaktree Capital Management on a loan facility, sold off its advisory services business, and offloaded brands associated with its Bebe Stores subsidiary. You might recall that Bebe operates around 50 Buddy’s Home Furnishings stores, to add another BRC Group-FRG connection.
One more note on Willkie, one of the firms that coughed up $100 million to keep Trump off their backs, a move that led to 20 or so attorneys leaving the firm. Willkie is the firm that Judge Laurie Selber Silverstein dismissed from the FRG bankruptcy case out of concern about conflicts of interest. Kirkland Ellis replaced Willkie and finished out the proceedings that culminated in June last year.
BUDDY MAC UPDATE:
This just in right before deadline: Former Buddy’s Home Furnishings franchisee Buddy Mac Holdings has motioned bankruptcy court in Texas to sell off its nine stores in Missouri to National TV Sales & Rentals of Missouri for $700,000.
The motion is of the “emergency” variety, meaning BMH claims it needs the deal done with court authorization within five days, with no auction, due to the severity of the chain’s fiscal circumstances.
The motion indicates that BMH’s primary secured lender, Phonix RBS, supports the sale.
A hearing on the sale is scheduled for Tuesday, and the deal is contingent on BMH receiving no other, better offers for the stores.
BMH, which operates 46 RTO stores in multiple states, filed Chapter 11 in early December. The proposed sale includes nine stores, one each in Dexter, Park Hills, Potosi, Perryville, Farmington, Sikeston, Fredericktown, Caruthersville and Crystal City, Missouri.
Under the agreement, National TV would acquire all active customer RTO contracts and the merchandise being rented to customers at these locations. The buyer would also assume the property leases for all stores except the Crystal City location, along with vehicle leases and ownership of delivery vehicles used by the stores. BMH would retain “idle inventory,” or merchandise sitting on store floors not under rental agreements, as well as its bank accounts and cash.
Court approval would allow the stores to transfer “free and clear” of existing liens and claims, giving National TV clean title without inheriting Buddy Mac’s debts or legal baggage, except for the specific liabilities it agrees to assume.
Founded in 1986, National TV is a privately held RTO chain with 19 stores in Missouri. Headquarters are in Lebanon, Missouri. Signing the sale agreement for National TV was Aaron Windsor, president.
Once the largest Buddy’s franchisees with 84 stores in eight states, BMH would shrink to 37 stores after the proposed sale, which is expected to gain quick approval. And the sale to National TV breaks the ice in this proceeding, so we expect more selloffs in the near future, perhaps even next week.
