by To those who breathlessly await updates in the Franchise Group-B. Riley-Prophecy Asset Management-American Freight-Buddy’s Home Furnishings-Conn’s-Badcock Home Furnishings-Brian Kahn-Bryant Riley soap opera, a thousand apologies. Thanks for not changing the channel. There are several updates to pass along.
First, a plot twist in the dispute between Franchise Group’s new owners, the first-tier lenders Octagon Credit Investors and Garnett Station Partners, and AF Newco over, among other things, a transition services agreement covering proprietary data storage, as well as the alleged involvement in AF Newco by former FRG CEO Brian Kahn.
The SEC filed suit against Kahn and Prophecy Asset Management executive Jeffrey Spotts on Sept. 29 for “a multiyear investment adviser fraud” that the SEC estimates cost investors $350 million, according to the SEC’s filing. The SEC says Kahn and Spotts deceived investors by falsely claiming they were putting their money into an investment that minimized risk. Prior to the charges being brought, Kahn denied knowledge of or involvement in any criminal or fraudulent activities.
As you probably know, AF Newco bought 30 American Freight stores and a distribution center out of bankruptcy for a song ($1.1 million), securing the sale against exactly zero competing offers.
Now the plot twist: According to a Bloomberg News report last week, yes, Kahn is involved in AF Newco, or was as recently as July 22. In a statement to Bloomberg, AF Newco said that after its president retired in May, the company hired Kahn on July 22 as an “adviser” for $50,000 because of his “historical knowledge of the American Freight business.”
President who?
This statement is interesting. First, who knew AF Newco even had a president? At the bankruptcy hearing in January approving the American Freight sale, representing the buyer was “managing member” Michael Piper, a longtime associate of Kahn’s at Liberty Tax. Also listed as a part of the buying group was another Liberty Tax veteran and longtime Kahn associate, Brent Turner, who in AF Newco’s social media since the acquisition has been titled the company’s chairman of the board.
So, who is or was this president who retired in May? This person retired after less than four months in the role?
Also quizzical is the choice of the word “hired,” which implies some permanence, or at the very least, more than a single consultation. Having said that, $50,000 is chump change for someone used to moving tens of millions of dollars.
Finally, statements from AF Newco both in their countersuit against the new FRG and to Bloomberg lack clarity on the current status of Kahn’s relationship to the company, if any there is. “Hired” is past tense, but it could refer to an ongoing “advising” arrangement. In the countersuit, AF Newco categorically but nonspecifically denies FRG’s claims regarding Kahn’s possible involvement.
FRG’s complaint also is a bit vague. While asserting that “[f]ar from having no involvement in AF Newco, Brian Kahn appears to have control over the company,” no evidence is presented in the complaint. FRG asserts that Piper’s testimony at the bankruptcy court in which he denied any current or expected involvement by Kahn in AF Newco was “critically important given the scrutiny and litigation surrounding Brian Kahn’s conduct, and that “based upon information and belief Kahn is purportedly the CEO of AF Newco.”
In its countersuit, AF Newco asserts that Piper’s testimony was “true and accurate.”
The Bloomberg story does not address the new FRG owners’ additional claim, also asserted in their lawsuit, that Kahn’s sister, Paige Kahn Perkins, was hired by AF Newco at Kahn’s recommendation. AF Newco’s counterclaim also is silent on this, but Perkins’s LinkedIn page shows no affiliation with the company.
Many have suspected Kahn’s involvement in AF Newco given the history shared by Kahn, Piper and Turner, and because of the central role American First Finance played in securing the acquisition of the stores. Piper testified that part of AF Newco’s backing to acquire the stores was $3.5 million from American First, a money that secured the payment solutions firm’s exclusive right to finance AF Newco customers.
FRG owned Liberty Tax until July 2021, and it was Liberty Tax that became FRG in 2019.
The Wartell Report
Second update to pass along: The litigation trustee for the new FRG, Lawrence Hirsh, was authorized by the Delaware bankruptcy court on Wednesday to proceed with accessing sealed documents in his investigation of potential misdeeds by, among others, FRG principals prior to FRG’s bankruptcy in November last year. Sealed by protective order, these documents include what the highly confidential Wartell Report, a product of an investigation of FRG by an independent auditor appointed by the debtors, Michael Wartell.
According to the order signed by Judge Laurie Selber Silverstein, the litigation trust, litigation trustee and litigation trust advisory board are “permitted to receive and use Confidential Material and/or Highly Confidential Material for any purpose consistent with the Plan and the Litigation Trust Agreement.”
In the report, Wartell mentions claims FRG’s creditors (and now owners) might pursue in litigation, claims in connection with Kahn’s pledge of shares of common stock in FRG to B. Riley Financial; “the lack of disclosure of Mr. Kahn’s pledging of his Franchise Group shares to B. Riley”; the source of Kahn’s ownership and funding of the shares; the take-private transaction; transfers of $54 million in funds from FRG’s holding company to Freedom VCM Holdings; and the decision to file for bankruptcy, according to a declaration by Wartell filed with the bankruptcy court.
The litigation trust was a key feature of the judge-approved plan for FRG to emerge from bankruptcy, and a highly contested one at that. Among those who fought the litigation trust’s establishment were Kahn and his wife, according to motions filed with the court.
More guilty pleas?
Finally, an update on the SEC’s Prophecy Asset Management investigation and prosecution. Bloomberg reported Wednesday that a prosecutor in that case predicted that more people will plead guilty, though he declined to mention names. The statement came at a federal court hearing to set a trial date for Spotts.
Prophecy principal John Hughes pleaded guilty two years ago to conspiring to commit securities fraud and has since cooperated with the SEC and DOJ.
“There are others, as Your Honor knows, who are planning to plead guilty,” assistant U.S. attorney Aaron Webman told U.S. District Judge Michael Shipp.
The list of possible “guilty” pleaders is a short one, and the statement implies that both the U.S. attorney and the judge know who they are. We know Hughes has cooperated. It’s possible Spotts now is cooperating, as well. And we repeat here that any, all are innocent until proven guilty.
Buddy’s sale imminent?
If anything good can come out of what’s left of FRG vis-à-vis home furnishings, it would have to be the sale of Buddy’s to a buyer from inside the industry who can nurse the brand back to health. That sale, finally, could be imminent.
There is an offer on the table and, according to someone close to the negotiations, a sense of increasing interest and urgency on the part of the new FRG to make the deal happen. The details left to iron out concern an up-to-date accounting of the current fiscal state of Buddy’s, the cure claims brought by former and current franchisees, and the possibility of liens against the company. No motion has been brought before the court seeking an asset sale approval yet, but we could be looking at days not weeks.
Once the sale is completed, if it is completed, Buddy’s franchisees likely would be interested in establishing new franchise agreements and pivoting to grow the store network rather than simply holding on for dear life.
So, that’s this episode of As the (Legal) World Turns. I’ve attempted to provide a Guiding Light here, though it might seem like an episode of General Hospital with all of the victims of all that missing Prophecy investment money. But, both the Young and the Restless want this litigation to end so whatever is left can just get on with it and get busy restoring faith in their brands with the American furniture buying public.
Yes, these are the Days of Our Lives, the Bold and the Beautiful and we only have One Life to Live. (If these last two paragraphs don’t make sense, just google “Top soap operas of all time.”)
