SEC probing B. Riley Financial deals with client linked to defunct hedge fund – report

The Securities and Exchange Commission is investigating B. Riley’s (NASDAQ:RILY) dealings with a client linked to alleged securities fraud as well as the use of his assets to help the bank get a loan from Nomura Holdings (NMR).

The SEC has carried out interviews in recent months about B. Riley (RILY) and its relationship with Brian Kahn, according to a Bloomberg report late Sunday, which cited people familiar with the matter. Kahn is said to be an unidentified co-conspirator in a Justice Department criminal case prompted by the 2020 demise of the Prophecy Asset Management hedge fund.

Officials have been evaluating how Kahn led a buyout of a retail business, Franchise Group Inc., in a deal arranged last year by B. Riley (RILY), according to the report. In August, Franchise Group Kahn, with help from B. Riley (RILY) and others, led a management-led buyout of Franchise Group for about $2.8 billion.

“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 email statement to Bloomberg.

A Nomura (NMR) representative said the bank declined to comment to Bloomberg.

News of the probe comes as B. Riley (RILY) shares have plunged 42% since early November when Bloomberg first reported about the fraud allegations and connections to Kahn. B. Riley shares fell 14% on Nov. 13 after S&P downgraded Franchise Group’s credit rating and wrote that the Kahn “situation is unresolved and could prove to be a distraction as the company navigates its strategy.”

Bloomberg reported last month that Franchise Group said a probe into its relationship with Prophecy Asset Management found it had no ties to the investment firm whose co-founder is involved in a securities fraud case. Franchise Group said the review found no evidence that a former relationship between its CEO Brian Kahn, and Prophecy had impacted B. Riley, according to the Bloomberg report, which cited a statement to lenders.

The recent share drop in B. Riley (RILY) also comes as the firm was the was the target of some short-seller reports last year. B. Riley’s short interest is 68%.