B. Riley CEO defends Franchise Group deal amid possible fraud allegations; shares plunge

B. Riley (NASDAQ:RILY) is down 27% this week as the head of one of its companies may be facing fraud allegations.

Brian Kahn, the head of Franchise Group, was named by Bloomberg as a possible co-conspirator in a $294 million fraud case in connection with a co-founder of Prophecy Asset Management. B. Riley invested nearly half a billion dollars this year in Franchise.

On Wednesday, B. Riley (RILY) CEO Bryant Riley defended its investment and relationship with Kahn as the investment firm reported its Q3 results.

“I know that today a statement came out from Brian denying any involvement in what happened with Prophecy, and that’s good enough for me,” Riley said on the company’s Q3 earnings conference call on Wednesday. “So I want to just be crystal clear: I believe we are going to make a lot of money for our shareholders in Franchise Group.”

“We would have bought all of Franchise Group. We are a huge fan of that business and it’s a really simple analysis,” Riley, the founder and chairman of B. Riley, said.

B. Riley (RILY) shares dropped 22% on Monday following a report Thursday that Kahn was affiliated with Prophecy Asset Management, where the co-founder last week pleaded guilty to defrauding clients of $294 million, according to Bloomberg.

A representative for Kahn didn’t immediately respond to a phone call and voicemail message from Seeking Alpha for comment.

In August, Kahn, with help from B. Riley (RILY) and others, led a management-led buyout of Franchise Group, which has businesses including The Vitamin Shoppe, Pet Supplies Plus and American Freight, for about $2.8B. The transaction represented B. Riley’s (RILY) second investment in Franchise Group. The company took an initial investment in Liberty Tax, which eventually became Franchise Group, in 2018.

The recent share drop in B. Riley (RILY) also comes as the firm has been the target of some short-seller reports this year, including one in February. B. Riley short interest is 24%.

–With assistance from Christiana Sciaudone