US authorities are investigating B. Riley Financial Inc.’s deals with a key client who was linked to a securities fraud, and the use of his assets to help the investment bank obtain a loan from Nomura Holdings Inc., according to people familiar with the matter.

The US Securities & Exchange Commission carried out interviews in recent months about B. Riley and its relationship with Brian Kahn, the people said, requesting anonymity as details aren’t public. Kahn is an unidentified co-conspirator in a US Department of Justice criminal case prompted by the 2020 demise of the Prophecy Asset Management hedge fund, Bloomberg News previously reported.

Officials have been scrutinizing how Kahn led a buyout of a retail business called Franchise Group Inc. in a deal arranged last year by B. Riley. Nomura partly financed the transaction, with some of Kahn’s assets pledged as collateral, according to the people and documents reviewed by Bloomberg.

Concern about B. Riley’s relationship with Kahn has helped send the Los Angeles-based firm’s shares tumbling, along with losses and writedowns on some of its investments, and the stock has attracted large bets by so-called short-sellers wagering on further declines. The brewing controversy also touches on Nomura, one of B. Riley’s biggest lenders, which has been seeking to repair its own reputation for risk management after losing almost $3 billion in 2021 amid the collapse of Archegos Capital Management.  

The stock fell as much as 10% Monday, and was down 2.5% at 9:47 a.m. in New York. By one measure, B. Riley is among the most shorted shares in the global financial services sector, according to a Jan. 16 report from S&P Global Market Intelligence.

A spokesperson for the SEC declined to comment. The probe is in its early stages. Scrutiny by the agency doesn’t necessarily mean anyone has engaged in any wrongdoing or that legal action will result, and Nomura isn’t the focus of the probe.

“We have not received anything from the SEC on this matter and to the extent the SEC makes an inquiry, we would fully cooperate as we have done in the past on all regulatory inquiries,” a spokesperson for B. Riley said in an emailed statement.

Short Sellers
“We would welcome an investigation into the outrageous tactics the short sellers have pursued to destroy B. Riley, including the coordinated options trading with zero disclosure obligations,” the statement said. “The short sellers continue to harass, intimidate, and insult employees and everyone associated with B. Riley, resorting to lies and crude remarks so they can personally profit.”

A Nomura representative said the bank declined to comment.

B. Riley told shareholders on Nov. 9 in its quarterly filing with the SEC that the firm has enough cash and other sources of liquidity to meet its needs. Kahn and his attorney didn’t respond to messages.

“At no time during my former business relationship with Prophecy did I know that Prophecy or its principals were allegedly defrauding their investors, nor did I conspire in any fraud,” Kahn said in a November statement. “Like many other investors, my relationship with Prophecy was costly, including economically, and I ceased doing business with Prophecy several years ago. In no way, shape or form has this previous relationship impacted Franchise Group.”

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