by As we mark one year since Franchise Group filed for bankruptcy, and what a year it has been, it should not surprise that there are yet more twists and turns to update.
We’ll start on the left coast and B. Riley Financial, which finally filed its fiscal first quarter 10Q for the period ended March 31 this year, reporting a loss of $12 million. This might have come as something of a surprise to shareholders, who were told back in May by the company that it was projecting a profit for the quarter of between $1 million and $6 million. (May would have been the normal timing of the 10Q’s filing.)
But, hey, $12 million in the hole is a lot better than the $51.2 million trench the company reported itself in for the first quarter of fiscal 2024. The difference? One-time gains on some restructuring in the wake of the Franchise Group bankruptcy and the roughly $450 million Bryant Riley and his holdings, including BRF, lost in that titanic’s sinking.
Thus, BRF’s operating loss for the quarter just reported jumped to $61.5 million from just $16 million a year ago, while revenue plummeted to $186 million from $298 million.
BRF cited, among other reasons, a drop in investment banking business linked to the firm’s streak of late filings. This doesn’t quite rise to the level of revelation, because you might be wondering about the second and third quarters. Investors are still waiting for those reports, as is the Nasdaq, which despite all of BRF’s accounting woes, voted to allow BRF to continue to be listed on the exchange.
Those investors are also probably a bit bothered that BRF has acknowledged problems with its financial reporting controls and that it replaced its auditor in September and switched out CFOs in May. BRF’s press release did not address the earlier projections of a profit.
It also can’t help that Riley’s longtime business associate Brian Kahn has been charged by the DOJ for criminal fraud to the tune of $350 million. More on that in just a moment.
For his part, Riley has said on a number of occasions that he neither did anything wrong nor knew anything about the fraud for which Kahn and Prophecy Asset Management executives John Hughes and Jeffrey Spotts have all been charged.
Despite all this, co-CEO Bryant Riley got a new compensation package effective two weeks ago worth about $10 million, according to the company. The new deal shifts Riley from a fixed salary and bonuses to a model based primarily on revenue generated through investment banking, which puts the focus on results. He is guaranteed $700,000 base per year, however.
Riley’s paychecks will also have a new name on them. BRF is changing its corporate name to BRC Group Holdings at the first of next year. While citing the reason for the name change as “reflecting its evolution into a portfolio of diverse companies,” shedding a name so closely tied to FRG has to have been at least a consideration. If you google “BRF,” you get findings with FRG and vice versa.
Kahn’s legal challenges
The name change that will erase BRF should be seen in the context of comments Riley has made since FRG’s bankruptcy, coming as that did just 15 months after Riley helped Kahn and FRG executives take the holding company private to the tune of $600 million in B. Riley obligations. The deal was worth a total of $2.8 billion. In interviews with the Los Angeles Times and Bloomberg, Riley has distanced himself from Kahn, saying he doesn’t even like saying his name.
Kahn was an investor adviser for Prophecy Asset Management, a hedge fund that imploded in 2020, disappearing $294 million of investor money in the process, according to court filings. It is that failure that led the SEC to file a civil action against Kahn in late September for what the agency says was his role in the fraud scheme, all the while earning millions in management fees.
Lost in the shuffle was that the SEC action came an entire month after a criminal indictment against Kahn by the DOJ. The indictment was made in August but not disclosed until a filing earlier this month in federal district court in New Jersey. Though the DOJ indictment filing is not public, we know it has to be largely duplicative of the SEC action, because the DOJ just motioned the court to “intervene and stay proceedings” by the SEC, according to the court docket, because the two actions are so largely duplicative.
And a week ago, the court in the DOJ action added a Dec. 10 hearing to its docket that includes Kahn’s initial appearance, bond hearing and plea agreement. That’s right, “plea agreement,” indicating both that Kahn will submit a plea and that some sort of agreement has been agreed upon with the DOJ.
The hearing is set for noon in Trenton in Courtroom 5W before Judge Michael A. Shipp, according to the court’s records.
The allegations in the SEC’s civil enforcement action “substantially overlap with active criminal cases filed” against Hughes, Spotts and Kahn, according to the DOJ’s motion, which requests a stay of the SEC action “in order to preserve the integrity of the prosecution of the Criminal Cases, advance the public interest and prevent the SEC Defendants from circumventing the narrow confines of criminal discovery through broad civil requests and related litigation,” the filing dated Nov. 14 states.
The DOJ’s motion also says that as of the date of its motion, none of the SEC defendants had answered the SEC complaint, which might make it easier for the court to grant the DOJ’s stay request, and that neither Spotts nor Kahn, through counsel, opposed the stay. Hughes has already pleaded and is scheduled for sentencing in March.
The SEC did not take a position on the DOJ’s request.
Arguing for the stay, the DOJ states that both the SEC and DOJ actions concern “the same business practices, contracts and payments,” according to the motion, practices regarding the “same securities fraud scheme charged in the criminal indictment.” Furthermore, the SEC action and the corresponding criminal prosecution “arise out of numerous common questions of law and fact related to the same securities fraud conspiracy orchestrated by the same defendants,” the motion states.
AF Newco versus FRG
Lastly on my docket is the claim and counterclaim made by FRG and AF Newco against each other. (If you need a recap of the claims and counter claims, FRG’s filing is here, and AF Newco’s counterclaims are here.) The Nov. 18 pretrial hearing for these actions was canceled because the bankruptcy judge, Laurie Selber Siverstein, declared the hearing unnecessary.
FRG has motioned for a judgment from Silverstein on its claim against AF Newco, while AF Newco has motioned for summary judgment.
The next step, therefore, is discovery, which puts 30 days on the clock to serve to get written testimony and evidence and another 21 days to get responses. In all, the structured timeline provides about 215 days before a trial, according to court filings made this week.
Finally, on Wednesday, Buddy’s Home Furnishings franchisees PENTEX and, separately, the Greene brothers (Patrick and Mike) withdrew their cure claims, which further greases the skids for a selloff of Buddy’s by FRG. We know of at least two bona fide offers on the table for FRG’s last holding in furniture, so a deal could break any day.
At the time of filing the cure claims earlier this year, PENTEX had 73 stores; the Greenes had 78 Buddy’s locations.
Turkey time!
All that’s left to say is, “Happy Thanksgiving!” I hope you enjoy time with family or friends, which isn’t to say that family can’t be friends or that friends can’t be family.
