by Key questions remain following SEC lawsuit filed against Kahn, Spotts, Prophecy
Monday proved rather hectic. First off, I teach full-time. Between classes, I got word that the SEC dropped the bomb, filing suit against former FRG CEO Brian Kahn for a raft of securities misdeeds. I taught that second class, coincidentally Media Law, then fled home to write up the SEC story based on the filing. That makes this column a “follo” as we call it in the journalism trade, an attempt to make sense of exactly what went down on Monday afternoon.
Before I get to that sense-making project, it’s important to say that the defendants, which also include Prophecy Asset Management and Jeffrey Spotts, are innocent until proven guilty. (Following the Monday afternoon bomb, the SEC announced criminal charges against Spotts, as well.) Thus, all we have so far are claims by the SEC, albeit from years of investigating that involved no fewer than five SEC bureaus (Trenton, New Jersey; Philadelphia; Los Angeles; Baltimore; and D.C.). The SEC requested a jury trial, so Mr. Kahn will get his day in court.
In addition, when the $294 million in missing money at Prophecy was first reported, when Kahn was identified as a co-conspirator in November 2023, he denied knowledge of or involvement in the Prophecy fraud. It’s also important to say that I have no financial interest in or affiliation with any of the parties or companies mentioned here. Lastly, we should note that just after the announcements, the federal government shut down, and that includes the SEC.
With those disclaimers out of the way, to make sense of the SEC’s filing, I believe it is essential to read it for what is absent. For example, the 42-page complaint makes no mention of FRG. Not a one, which is disappointing, because we are most interested in why so many good furniture people had to lose their livelihoods because of FRG’s demise. To what extent, if any, did the fraud scheme at Prophecy negatively impact FRG and its subsidiaries in furniture, Buddy’s Home Furnishings, American Freight and Badcock Home Furnishings.
As a corollary, we’re interested in how the bankruptcy contributed to the foundering of Conn’s and Badcock, the latter sold off by FRG to Conn’s for so shockingly little.
Sham shares?
The filing does mention, in point 5, that Prophecy, as directed by Spotts and John Hughes, “allocated the vast majority of Prophecy’s capital to Kahn, who incurred massive trading losses,” and that some of that lost money, point 6, went into “investments into Kahn entities” resulting in “substantial” losses.
Was FRG or any of its subsidiaries one of these entities? The filing doesn’t specify, and FRG would have been one among so many options for Kahn, who seems to spin off corporate entities much like Marvel spins out action movies: Vintage Capital, Vintage RTO, Vintage Tributum, Vintage Vista, Samjor, Kahn Capital, Little Gator Trust, etc.
FRG subsidiary Buddy’s Home Furnishings is mentioned, however, and in great detail. According to the SEC, Kahn and Hughes “fabricated certain documents concerning a purported agreement between Prophecy and Buddy’s” that made Prophecy an owner of Buddy’s to the tune of $125 million of non-existent preferred stock shares, the issuance of which was backdated by about 17 months (dated January 2018 in June 2019).
That invented preferred stock was then used as collateral to secure Kahn’s 2018 trading losses on behalf of Prophecy and the hedge fund’s investors, according to the SEC’s claims.
“The entire agreement and transaction was a sham created by Kahn, Spotts, and Hughes,” the SEC asserts, as was another preferred share-based transaction that same month, June 2019, the second one to the tune of $150 million of conjured equity.
“As before,” the SEC asserts, “these shares did not exist.”
Hughes has admitted to his role in the fraud scheme. His sentencing is scheduled for March 2026.
Saving Buddy’s
Buddy’s Home Furnishings is all that remains of FRG in the furniture sector, and it is vulnerable. Surviving franchisees aren’t willing to sign new franchising agreements until either their cure claims are answered or a buyer other than anyone associated with the old FRG is approved to acquire what’s left, according to two sources with knowledge of the negotiations. Time is running out.
Complicating matters is the fact that, according to public records filed in Texas, specifically a form called a UCC filed with the office of the secretary of state, a company called PHONIX RBS LLC has acquired a substantial loan owed by the largest of the Buddy’s franchisees, Buddy Mac Holdings. (A message to Buddy Mac hasn’t yet been returned.)
The UCC has PHONIX RBS acquiring the loan from a bank in Wichita, with PHONIX listed as being based in Delaware but headquartered in what appears to be an empty home in Arkansas registered to an Arkansas attorney. I have not been able to confirm but am led to understand that the PHONIX RBS is an entity established by Brent Turner, a member of the group that formed AF Newco to buy 31 American Freight stores. Turner was for four years the CEO of Liberty Tax, which is the company that was used to form FRG in a reverse IPO in 2019.
Turner was named president and CEO of Liberty Tax in October 2019 and fired in June 2023, according to news accounts. Michael Piper, formerly CFO at Liberty Tax, is AF Newco’s “managing member,” according to court documents. I mention this because, as HNN recently reported, the new owners of FRG, led by L1s Octagon Credit Investors and Garnett Station Partners, filed suit in bankruptcy court against AF Newco for breach of contract, threats to delete critical corporate records, and misleading the court about ties to Kahn.
Gator Elite RTO
In that suit brought by the L1s, it is asserted that AF Newco threatened to delete the reorganized FRG’s documents and data, information stored on a system maintained by American Freight, unless the new FRG owners agreed to sell AF Newco a pair of Buddy’s stores. Why? What is so important about those two stores? According to the complaint, Piper made the ultimatum.
Missing from the L1s’ complaint, however, are the addresses of these two all-important Buddy’s stores. Might they be in Texas? Might they be owned by Gator Elite RTO, which, according to sworn testimony is a company owned by a group that includes Kahn through an entity called Little Gator Trust? Public records in Florida show that the principal for the LLC is Jeremy Nowak of Plantation, Florida; Nowak is a long-time associate of Kahn’s. Why is this important? It could shed light on who, in fact, is involved in AF Newco and what that group is seeking to do with respect to what are (Buddy’s) and formerly were FRG assets (American Freight).
Paying back investors
Another absence in the SEC filing is anything about Kahn failing to pay a $200 million settlement to the Prophecy investors who lost that nearly $300 million, an allegation made by a trustee in the Prophecy case. The trustee, Ted Gavin, claimed Kahn had agreed to pay $200 million in cash and shares, but failed to pay an initial $1.5 million or turn over $5 million in FRG shares, according to news reports in February 2024. FRG filed for bankruptcy nine months later.
This settlement and the allegation that Kahn failed to honor its terms have been almost completely ignored, getting only rare and brief mentions in news media that cover Wall Street.
Also absent in the filing is any mention of B. Riley Financial or its CEO Bryant Riley, which perhaps isn’t all that surprising given that FRG does not get a mention, either. Riley and BRF almost single-handedly kept FRG afloat via loans, equity stakes and acquisitions of Badcock receivables.
Recently, in a pair of interviews with Bloomberg, Riley distanced himself from Kahn in ways and to a degree he has not previously done. Of the $450 million in BRF write-offs necessary after the FRG bankruptcy, Riley told Bloomberg, “We just didn’t overwrite for that,” saying he felt betrayed by and angry with Kahn. “I don’t like saying his name, honestly.”
Going forward, Riley said he thinks about the people who work at BRF. “I don’t think about Brian Kahn,” he told Bloomberg.
FRG Litigation Trust
So many questions remain, including whether the SEC and/or the DOJ have other actions in the works. The U.S. government will need to resurrect before we learn more on that front.
Finally, an update on the reorganized FRG litigation trustee’s motion to access information sealed by a protective order from the court, information that includes the Wartell Report. In a bankruptcy court hearing on Monday, Judge Laurie Selber Silverstein said she needs certification that anyone affected by the unsealing has been notified and given the chance to object before she grants the motion. In a hearing that lasted seven minutes, counsel for the trustee indicated that this certification could be effected rather quickly.
