(Bloomberg) -- B. Riley Financial Inc., buffeted by speculation about its dealings with a client who was implicated in the collapse of Prophecy Asset Management, said an internal review found no ties between the investment bank and the now-defunct hedge fund.

“The company and its executives, including Bryant Riley, had no involvement with, or knowledge of, any of the alleged misconduct concerning Prophecy,” B. Riley said in a statement Thursday. The board also reaffirmed its confidence in the integrity of the company’s reporting and its role in the management-led buyout of Brian Kahn’s Franchise Group Inc. Shares of B. Riley gained more than 30% in New York trading.

B. Riley is pushing back on short-sellers who have questioned the firm’s dealings with Kahn, who has been tagged by prosecutors as an unindicted co-conspirator in a fraud case stemming from Prophecy’s 2020 collapse, Bloomberg reported. The co-founder of Prophecy, John Hughes, pleaded guilty in November after the fund lost about $294 million and hid it from investors.

In turn, US regulators have been looking at B. Riley’s deals with Kahn, which have included helping to finance a management-led buyout of Kahn’s Franchise Group and the use of his assets to help the investment bank obtain a loan from Nomura Holdings Inc., Bloomberg has reported. B. Riley’s stock has been under pressure, losing more than half its value in the past year, on concern that Kahn’s troubles could spill over into B. Riley. 

Read More: B. Riley Financial Board of Directors Issues Statement Regarding Internal Review

Kahn, who stepped down as Franchise Group’s chief executive in January, has consistently denied wrongdoing and hasn’t been charged with anything. His attorney has said there’s no connection between Kahn’s resignation and any impending action by regulators. The inquiry by the Securities and Exchange Commission doesn’t necessarily mean anyone has done something wrong, and such probes sometimes conclude without any further action.

B. Riley said its dealings with Kahn were on market terms and that it holds a perfected first lien on Franchise Group-related assets that have been central to the concerns raised by short-sellers. The firm decried their actions, including what it called personal harassment, saying the allegations lack merit and “far exceeded the acceptable limits of financial research.”

Short Sellers

Marc Cohodes, one of the short sellers who has been focused on B. Riley, said the statement didn’t address key points of the dispute. He continued to question the company’s financial stability, noting that it has negative tangible book value, and said B. Riley needs to restate prior results to account for loans it made to Kahn. He objected to the choice of Sullivan & Cromwell, the law firm that conducted the review, because it worked on the Franchise Group buyout deal for B. Riley, and has been the investment bank’s counsel for many years.

“Mr. Kahn categorically denies any knowledge of wrongdoing perpetrated by the managers of Prophecy, an entity that he stopped dealing with several years ago and which defrauded Mr. Kahn out of tens of millions of dollars,” according to a statement from his attorney.

The company’s statement didn’t deal with all of B. Riley’s previous deals with Kahn, but it did address an aborted 2018 effort by Kahn’s Vintage Capital Management to buy Rent-A-Center Inc., one of the largest rent-to-own chains in North America. B. Riley acted as an adviser for Kahn, and the transaction has been part of the critique raised by short sellers.

Breakup Fee

According to court papers, Vintage and B. Riley personnel “simply forgot” to send a required notice to extend the deal’s completion date and missed the deadline in December 2018. That triggered Rent-A-Center’s demand for a $126.5 million breakup fee from Vintage.

Vintage and B. Riley lost the court case that followed, and they agreed to settle the matter by paying $92.6 million. Rent-A-Center received the money, but B. Riley said in a filing that it bore none of the cost, raising speculation about whether this had created an obligation to Kahn.

According to today’s statement, B. Riley said it “does not owe — and never owed — any debt, of any nature, to Mr. Kahn on account of the resolution of the Rent-A-Center litigation.”

“There was not a ‘client revenue-sharing agreement’ with Mr. Kahn, and the transactions with Mr. Kahn and his companies were on market terms,” according to the statement.

--With assistance from David Voreacos.

©2024 Bloomberg L.P.