Investigators from the SEC’s Los Angeles office have also sought information about bebe stores inc., a women’s clothing chain that B. Riley controls and that also had dealings with Kahn, one of the people said.
Representatives for bebe stores didn’t respond to a request for comment.
B. Riley, founded by Chief Executive Officer Bryant Riley, traces its roots to 1997 as a boutique stock-picking firm focused on smaller companies. It now offers a birth-to-death business model for smaller publicly traded clients, including stock and bond offerings.
Franchise Group
Kahn is a longstanding client of B. Riley’s who has been involved with multiple businesses. Last August, the bank helped him lead a management buyout of Franchise Group, or FRG, a retail company based in Delaware, Ohio.
Nomura led a $600 million lending syndicate for B. Riley to help finance Kahn’s takeover, putting in place the three-way relationship that now exists among the parties, according to loan documents reviewed by Bloomberg News. The Japanese bank committed $240 million, more than any other lender, one of the people said.
B. Riley put up about $1.5 billion of various assets as collateral for the loan, the documents show. Some $220 million included shares of FRG, while $200 million is a loan B. Riley made to Kahn that is itself secured by more FRG stock, according to the documents.
Prophecy Management
Several months after the FRG deal closed, a Kahn associate named John Hughes pleaded guilty to conspiring to defraud investors out of $294 million through Prophecy Asset Management, a now-defunct investment fund.
One of Hughes’s co-conspirators was “the CEO and president of a multibillion-dollar company that owned and managed large and diversified retail franchises,” according to the charging document prosecutors filed in New Jersey federal court. That conspirator was Kahn, according to a person familiar with the matter, Bloomberg previously reported.
The SEC also sued Hughes in a complaint that details massive trading losses by Individual 2. The agency’s depiction of Individual 2’s alleged actions matches the description of Kahn in the Hughes criminal case.
It also aligns with a 2020 civil lawsuit filed in New York by a group of Prophecy investors who named Kahn and others as defendants. They alleged Kahn helped to swindle them out of tens of millions of dollars and used more than $100 million to amass a controlling stake for himself in FRG. Kahn has not been charged and denies any wrongdoing.
The case, filed in federal court in New York, was referred to arbitration and dismissed in 2022. It’s not clear from court records whether there was a settlement or whether Kahn paid any money.
The allegations against Kahn rippled through B. Riley’s relationship with Nomura and FRG’s credit rating. Loan documents show that at Nomura, a team of external advisers encouraged the Tokyo-based bank to write down the value of the loan to B. Riley, citing the allegations against Kahn and warning that the collateral for the debt may be tainted by fraud.
Nomura decided not to take action, citing the overall strength of the loan, according to the documents and one of the people.
However, S&P Global Ratings downgraded FRG’s credit rating, which was already deep in junk territory, to B minus on Nov. 10, warning that its high leverage and “weak operating performance” could make its heavy debt burden unsustainable. S&P described the allegations against Kahn as an “unresolved” situation that could distract the company.
This article was provided by Bloomberg News.