B. Riley and ex Franchise Group execs each take bold steps

Fallout from B. Riley-Franchise Group dealings continues

Only 10 months has elapsed since Conn’s acquired Badcock from Franchise Group in an all-stock deal. Oh, but what a whirlwind 10 months it has proved to be. 

Less than a month after the deal was announced, FRG CEO Brian Kahn stepped down amidst reports that the SEC was investigating his role in the collapse of the Prophecy Asset Management hedge fund and, with that collapse, $294 million in “missing” investor money. (Kahn has denied any role in or knowledge of the missing money, and he has not been charged with any crime.) These reports also have the SEC and now the DOJ looking hard at B. Riley’s dealings with Kahn and FRG, loans and investments that add up to nearly $1 billion.

Over the summer, Conn’s filed for bankruptcy and abruptly began closing hundreds of stores throughout the Southeast, including all of the Conn’s and Badcock locations. The company tapped to handle the GOB sales, Great American Group, a B. Riley subsidiary, has long been rumored to be up for sale as B. Riley Financial attempts to fend off increasingly impatient lenders. 

That rumor now is a reality: Oaktree Capital Management acquired a 53% majority stake in Great American for just over $200 million, according to a report in the Los Angeles Times and corroborated by reporting from Reuters. The deal leaves B. Riley with a 47% stake in Great American valued at about $180 million in a new holding company being formed by Oaktree and B. Riley, according to the Times.

“This transaction is an important step in our plan to reduce our debt while reinvesting in our core financial services business,” said Bryant Riley, chairman and CEO of the eponymous boutique banking firm based in Los Angeles. 

The sale also ends a chapter of history for B. Riley Financial, which formed in 2014 when Bryant Riley’s privately held stock firm merged with Great American. 

Attorneys general convention

Meanwhile, on the other coast, coincident with the Oaktree deal’s announcement, Bloomberg reported that Kahn has hired former New Jersey and one-time presidential candidate Chris Christie to represent him in the “ongoing criminal investigation” into the Prophecy collapse. 

The move gives Kahn a sort of New Jersey all-star team of prosecutors to represent him: Christie was once U.S. attorney in New Jersey. In representing Kahn, he joins Chris Porrino, a former attorney general in New Jersey, according to Bloomberg, citing anonymous sources.

Bloomberg also reported that Christie has already met with prosecutors and that they are deliberating over whether to charge Kahn in the Prophecy collapse. A grand jury in Newark is in discussions on the possible charges.

Prophecy co-founder John Hughes has already pleaded guilty to conspiracy to commit securities fraud, doing so just as Kahn and FRG dumped Badcock after two years spent stripping the Mulberry, Florida-based chain of its assets.  

As we’ve reported in this space in a continuing series of “pinboarding” exercises that attempt to chart the many intersections of B. Riley and Franchise Group interests, including and especially those orchestrated by Bryant Riley and Brian Kahn, much is still in question. Chief among these questions is just what the two principals knew about FRG’s precarious financial state when they brokered a buyback of FRG that took the company private, a $2.8 billion deal done in August 2023. Also chief among the mysteries is whether the $294 million missing from Prophecy’s portfolio ended up as collateral for or otherwise factored into the loans B. Riley extended to FRG to broker the deal.

Because of FRG’s financial struggles since the take-private deal, highlighted by the “sale” of Badcock to Conn’s for $1 million in stock, B. Riley’s stock price has since tanked. The company even delayed filing of its quarterly 10-Q for the period ended June 30, 2024, a filing that is still outstanding. 

Reading the tea leaves

Now what follows is pure speculation on my part, but it seems that whether additional charges are brought by the SEC or DOJ hinges on what Kahn might give prosecutors on Riley, if anything, and on what Riley might give prosecutors on Kahn, if there is anything to give. Separately, Riley has been served a subpoena by the Court of Chancery for the State of Delaware in a lawsuit brought against Kahn and FRG by former FRG investors who claim to have been duped about FRG’s fiscal health at the time of the buyout.

The lawsuit’s plaintiffs claim that the take-private move could have been intended to “avoid public company scrutiny of (Kahn’s) fraudulent transactions,” according to page 71 of the filing, alleging that Kahn “illegally covered up $294 million in lost Prophecy [Asset Management] funds.”

Repeating here, Kahn has denied any knowledge of Hughes’ or Prophecy’s misdeeds, even though Kahn was a money manager for Prophecy with control of 86% of Prophecy’s funds at the time, according to Bloomberg’s reporting.  

The FRG buyback that B. Riley most certainly regrets at this point made FRG one of B. Riley’s most significant holdings, a fact that eventually led to the delayed filing announcement. Accompanying that announcement was a warning that B. Riley would likely write down as much as $370 million of its investment in FRG. 

In late September, Riley told the Los Angeles Times that he regretted so quickly accepting Kahn’s account of his role at Prophecy and claims of innocence.

“It’s my nature if I know you, and I’ve known you for a long time, and I’ve seen you do nothing but ethical stuff … I just didn’t believe it,” Riley told the newspaper. The FRG deal “did not work out the way we had hoped it would work out, and it’s been devastating to our stock price.”

‘Nothing to see here’

In August, Riley told investors he expects the SEC will determine that “we had no involvement with or knowledge of any alleged misconduct concerning Brian Kahn or his affiliates,” according to Bloomberg.

Riley has also said that his firm has lowered its debt related to the FRG deal to about $380 million, part of a total of $1.9 billion in debt burden carried by the company.

We also reported here earlier this month the departure of the senior managing director of B. Riley Wealth Management, Eric Lyon, and another B. Riley financial adviser, Philip Wunderlich. Since then, Advisor Hub reports that Stifel Financial has reached out to top B. Riley brokers with offers of retention. 

This could mean that Stifel is interested in acquiring B. Riley Financial’s wealth division or, at a minimum, as Advisor Hub’s Mason Braswell and Karmen Alexander surmise, that Stifel might want the right to recruit from B. Riley’s ranks of advisers. Either motive for the offers makes sense, because an acquisition in this case depends on the talent that comes with it. 

Stifel’s offers came after approximately two dozen B. Riley brokers left to join Kestra Advisory Services, the firm to which Lyon went, as Advisor Hub reported earlier. For B. Riley Financial, then, the proverbial clock is ticking. The deal with Oaktree likely buys more time.

Between the Delaware lawsuit and its evidentiary phase, the federal investigations, and the information that is disclosed as part of acquisitions and sales, we just might get to the heart of this pinboard mystery, a saga that has caused so many, including so many pensioners and Conn’s and Badcock employees, a great deal of pain.