How One Bad Deal Derailed This Prominent L.a. Financial Services Firm

In nan acheronian moments of nan early pandemic, Bryant Riley was riding high.

The Los Angeles finance banker had successful nan anterior decade merged his banal patient pinch plus disposition master Great American Group, which flourished arsenic online income surged and thousands of stores closed.

“We judge we person built a level to not only withstand volatile markets but besides to use amid destruction,” nan laminitis of B. Riley Financial told analysts.

The assurance wasn’t misplaced. By 2021, profits astatine nan institution exploded.

Bryant Riley of B. Riley Financial.

(Ringo Chiu)

The Westwood-area patient had go 1 of nan nation’s starring finance banks for mini and midsize companies — handling first nationalist offerings and reverse mergers and providing investigation connected immoderate 400 firms, among different services.

Now, immoderate are questioning whether nan 27-year-old institution pinch much than 2,000 labor tin survive.

What led to nan melodramatic reversal of fortune? Its biggest woody ever went bad, starring to immense losses, nan clang of its banal value — and a Securities and Exchange Commission investigation.

The company’s challenges, immoderate investors say, service arsenic a cautionary communicative connected nan perils of placing excessively large a stake connected a azygous deal.

Riley has acknowledged that nan SEC probe stems from his firm’s dealing pinch Brian Kahn, who led a $2.8-billion management-led buyout of Franchise Group, nan proprietor of retailers including Vitamin Shoppe and Pet Supplies Plus.

Kahn is simply a longtime Riley business subordinate who has been linked to nan 2020 illness of a hedge money that national prosecutors allege defrauded investors retired of $294 million.

Kahn denies immoderate wrongdoing, and Riley denies immoderate knowledge of immoderate fraud. But nan ungraded threatens to swamp his firm, which took connected indebtedness and lent Kahn $200 cardinal to build and return nan Delaware, Ohio, institution private.

The SEC investigation has spooked investors and made nan L.A. patient nan astir highly shorted banal connected nan market, according to investigation patient S3 Partners. Shares that approached $90 3 years agone are now trading beneath $6.

Amid nan scrutiny, B. Riley successful August marked down its investment successful Franchise Group by up to $370 cardinal and expects to grounds a nonaccomplishment of up to $475 cardinal successful nan 2nd quarter.

Riley, 57, is taking fierce steps to prevention his embattled empire.

“I americium assured we are going to get done this bad transaction and travel retired of it,” he told The Times past week astatine his agency overlooking nan 405 Freeway successful his first question and reply since nan controversy. “I consciousness a batch of responsibility.”

Riley has suspended a rich | dividend that paid him millions annually. He’s renegotiated debt. He’s trying to waste disconnected businesses. And he’s moreover made an connection to return his institution private.

But not everyone is convinced it will beryllium enough.

“B. Riley is truthful collapsed correct now,” said Nate Koppikar, a prominent short seller who has stake connected nan firm’s banal value continuing to decline. “I don’t cognize really they could perchance past this.”

Riley, who was calved successful Rockville, Md., was obsessed pinch stocks astatine an early age.

He gave his begetter $100 from his paper-route net to bargain shares erstwhile he was conscionable 14 aliases 15, he recalled successful a Los Angeles Business Journal interview.

“The champion point that happened is I bought losers and figured retired very quickly you amended cognize what you are buying,” he said.

At Lehigh University successful Pennsylvania, nan early entrepreneur made and sold T-shirts pinch his fraternity relative Tom Kelleher. Both men are now co-chief executives of B. Riley.

After graduating successful 1989 pinch a finance degree, Riley knocked astir nan manufacture earlier starting successful 1997 what was called B. Riley & Co. pinch his woman and Kelleher.

The fledgling patient provided investigation to organization investors, focusing connected mini section and California companies ignored by ample banks.

“We wanted to travel section companies wherever you could spell spot nan whites of nan CEO’s eyes,” he told nan Business Journal.

The patient had less than 100 labor 5 years aft it started, but successful 2014 made an different woody that would supercharge its growth: It went nationalist done a merger pinch Great American Group, known for liquidating chains specified arsenic Mervyn’s during nan 2008 financial crisis.

B. Riley Financial offices are successful Westwood.

(Jason Armond/Los Angeles Times)

What followed were a dizzying bid of deals that created today’s B. Riley. He acquired wealthiness managers, small-cap finance banks and brokerages, and myriad different businesses.

He bought a bid of bequest communications companies, starting successful 2016 pinch net work supplier United Online. And he scooped up brands of faded apparel companies, including girls clothing marque Justice, now sold successful Walmart.

It was a motley assortment of businesses that Riley acknowledges was difficult for Wall Street to understand.

“Our guiding rule has ever been to find unsocial finance ideas that tin make outsized returns,” he said, during 1 telephone pinch analysts.

Riley has been rewarded for his success. He earned $5.6 cardinal past twelvemonth and received astir $27 cardinal successful dividends. He besides owns homes worthy $9.7 cardinal successful Pacific Palisades and $21.7 cardinal astatine an exclusive Montana resort, according to existent property records.

Riley’s ties to Kahn, nan Franchise Group founder, day backmost to his first twelvemonth successful business.

Riley said he met him successful 1997 aft Kahn had founded his ain mini firm, called Kahn Capital Management. Kahn was a customer to whom B. Riley offered banal research, successful nan dream that it would lead to banal trades nan patient could fill.

Working retired of a one-room office, Riley said, he would overhear his salesman talking to investors, including Kahn.

“I’d get connected that telephone pinch that client, truthful that’s really I sewage to cognize Brian. He was trafficking successful small-cap stocks too.”

Kahn, 50, from Boca Raton, Fla., had attended Harvard, wherever he was a protect back connected nan shot squad successful 1995. He started astatine Boston plus head Fidelity earlier striking retired connected his own.

Riley said he had small interaction pinch Kahn for a decade aliases much aft those early years, speech from executing a fewer trades aliases moving into him astatine a conference.

Kahn had started an finance money successful Orlando, Fla., called Vintage Capital Management. Kahn proved himself ambitious, taking a liking successful 2012 successful Buddy’s Home Furnishings, nan nation’s third-largest concatenation of rent-to-own furniture, appliances, electronics and different user goods.

In 2014, he made a $2.3-billion bid for nan rent-to-own industry’s largest chain, Aaron’s. When that didn’t activity out, Kahn became willing successful acquiring Rent-A-Center, nan industry’s second-largest chain.

A workfellow of Kahn reached retired to Riley to transportation him connected nan thought of participating successful nan deal.

Riley said he looked it complete and decided he wanted in, helping raise money for a $15-per-share offer, while putting successful his ain firm’s superior for an equity stake.

Rent-A-Center accepted a $1.37-billion buyout connection from Vintage successful June 2018. But arsenic an antitrust reappraisal dragged on, Rent-A-Center alleged that Vintage had grounded to widen nan deal’s expiration day and demanded a $126.5-million breakup fee.

Kahn disputed that, but a Delaware Chancery Court judge successful March 2019 decided successful Rent-A-Center’s favor. Riley said successful an question and reply that nan woody would person generated hundreds of millions of dollars successful returns had it gone through.

In 2018, Riley said Kahn came to him pinch an thought to bargain into Liberty Tax, a franchise taxation preparer based successful Virginia Beach, Va., that is simply a smaller competitor to H&R Block. The thought was to bargain different franchisers that would later beryllium sold disconnected for a profit, overmuch for illustration a backstage equity business.

Riley liked nan idea, believing Liberty’s banal was undervalued. “I’m like, ‘This is really interesting. We’re going to rotation up immoderate different franchise businesses and we want to beryllium portion of it,’” he said.

Vintage and B. Riley took stakes successful Liberty Tax, which acquired Buddy’s. The merged institution changed its sanction to Franchise Group and started buying companies, including Sylvan Learning.

“They are each remarkably akin because they each make a batch of free rate flow,” Kahn said of nan acquisitions astatine a 2022 conference.

Given his company’s much than 10% stake, Riley took a committee seat.

With much than 3,000 locations, Franchise Group took disconnected during nan pandemic, earning $364 cardinal successful 2021. But, for illustration different retailers, it was squeezed arsenic consumers yet drew down their COVID stimulus checks and liking rates rose.

Riley discussed pinch Kahn a imaginable acquisition of Franchise Group, but decided alternatively to assistance Kahn successful taking nan institution private, according to a regulatory filing. Riley said he thought nan company’s shares were undervalued.

Kahn led a $2.8-billion guidance buyout successful August 2023, pinch B. Riley providing $600 cardinal successful financing done indebtedness it had taken retired from Japanese slope Nomura and different lenders. It besides raised equity from different investors and took its ain 31% stake.

Additionally, B. Riley lent Vintage $201 million, which was mostly secured pinch shares of Franchise Group, according to a regulatory filing. Riley said astir half of nan indebtedness was made to Kahn arsenic he was establishing Franchise Group and buying up shares, pinch nan remainder stemming from nan buyout.

Suddenly, Riley had a immense magnitude invested successful a azygous deal.

While Kahn was engaged assembling Franchise Group pinch thief from Riley, he was besides progressive successful different business: Prophecy Asset Management, a hedge money pinch offices successful New York and South Carolina.

The money was group up to supply investors pinch coagulated but safe returns, pinch assets dispersed retired among “sub-advisors” whose investments were tracked and who were required to reimburse nan money for first losses.

In March 2020, however, nan money collapsed because of dense losses. A suit revenge nether seal alleged Kahn, arsenic a sub-advisor, had controlled arsenic overmuch arsenic 86% of nan fund’s $363 cardinal successful assets and that overmuch of nan money was utilized to get shares and return a controlling position successful Franchise Group.

The suit was dismissed and unsealed 2 years later. Kahn denied wrongdoing but settled for astir $70 cardinal successful arbitration, Bloomberg News reported.

Kahn and his lawyer did not respond to requests for comment.

The fund’s illness and investor losses of $294 cardinal sparked a criminal investigation by nan Department of Justice. John Hughes, nan fund’s co-founder, pleaded blameworthy Nov. 2 to conspiracy to perpetrate securities fraud.

Hughes was charged by national prosecutors pinch hiding monolithic trading losses pinch 2 unindicted co-conspirators, including 1 described arsenic nan “CEO and President of a multi-billion dollar institution that owned and managed ample and diversified unit franchises.”

That aforesaid day, nan Securities and Exchange Commission filed civilian charges successful nan lawsuit against Hughes, alleging that Vintage played a domiciled successful nan alleged fraud, though it is not named arsenic a defendant. Kahn has not been charged.

After Hughes entered his plea, Kahn issued a connection to Bloomberg saying that “at nary clip during my erstwhile business narration pinch Prophecy did I cognize that Prophecy aliases its principals were allegedly defrauding their investors, nor did I conspire successful immoderate fraud.”

Bryant Riley of B. Riley Financial.

(Ringo Chiu)

That day, during his firm’s third-quarter convention call, Riley expressed religion successful Kahn’s occupation of innocence. “That’s bully capable for me,” Riley said. “I judge we are going to make a batch of money for our shareholders.”

Riley, who has not been accused of immoderate engagement successful nan fraud, besides defended nan finance successful Franchise Group.

But nan net announcement disclosed that B. Riley had marked down nan worth of its equities portfolio, contributing to a $75.8-million quarterly loss.

S&P Global besides dropped Franchise Group’s indebtedness ratings further to junk status.

“These investments they’ve made are bad, but [Franchise Group] is nan Titanic,” said Marc Cohodes, a short seller who declined to disclose nan size of his position successful B. Riley.

Riley said he personally knows thing astir what happened astatine Prophecy, and regrets making specified a forceful connection defending Kahn.

“It’s my quality if I cognize you and I’ve known you for a agelong time, and I’ve seen you do thing but ethical worldly — I conscionable didn’t judge it,” said Riley, who added that while he was friends pinch Kahn, he ne'er considered him much than a business associate.

In January, Kahn resigned arsenic main executive of Franchise Group.

The pursuing month, B. Riley announced that an investigation led by extracurricular counsel had concluded its laminitis and others astatine nan institution had nary engagement pinch aliases knowledge of immoderate wrongdoing astatine Prophecy.

Events came to a caput successful August erstwhile B. Riley announced a markdown of up to $370 cardinal of its Franchise Group finance and nan Vintage loan. It besides suspended its quarterly dividend, and Riley disclosed his patient had received subpoenas from nan SEC, which was investigating his firm’s dealings pinch Kahn.

Riley said astatine nan clip he was assured regulators would find nan patient “had nary engagement pinch aliases immoderate knowledge of alleged misconduct concerning Brian Kahn aliases his affiliates.”

News of nan investigation pummeled nan stock, which deed a debased of $4.51, causing nan Nasdaq to halt trading respective times.

Franchise Group “did not activity retired nan measurement we had hoped it would activity out, and it’s been devastating to our banal price,” he said.

Riley, who owns 24% of nan communal stock, later made an offer to return nan institution backstage astatine $7 a share.

B. Riley precocious disclosed that it was successful discussions to waste a 53% liking successful Great American Group and each its unit apparel brands for much than $400 cardinal to thief trim its debt, which totals astir $1.9 billion.

Riley acknowledged he was excessively optimistic astir Franchise Group, but noted galore retailers person suffered akin challenges. And he said B. Riley has profitable businesses specified arsenic advisory services.

“There’s awesome group here. There’s a awesome business,” he said. “We made a ample investment, but I don’t deliberation we stake nan house.”

Koppikar, nan short seller, traces B. Riley’s problems to its founder’s dreams of expanding good beyond its halfway operations.

“He went from being benignant of a bully mini banking, restructuring and liquidation cognition into a hodgepodge of empire building,” he said.