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(Bloomberg) – U.S. authorities have investigated B. Riley Financial Inc.’s dealings with a major client involved in securities fraud and the use of his assets to help the investment bank obtain loans from Nomura Holdings Inc. We’re investigating. According to a person familiar with the matter.
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The U.S. Securities and Exchange Commission has conducted interviews in recent months about B. Reilly’s relationship with Brian Kahn, the people said, asking not to be identified because the details are private. Khan is an unidentified co-conspirator in a U.S. Department of Justice criminal case stemming from the 2020 collapse of the Prophecy Asset Management hedge fund, Bloomberg News previously reported.
Authorities are scrutinizing how Mr. Khan led the acquisition of a retail business called Franchise Group in a deal orchestrated by B. Riley last year. Nomura partially funded the deal by pledging some of Mr. Khan’s assets as collateral, according to people and documents reviewed by Bloomberg.
Concerns about B. Reilly’s relationship with Khan have sent the Los Angeles-based company’s stock price tumbling, with losses and write-downs on some of its investments, and so-called short sellers betting the stock will fall further. attracting large amounts of bets. The controversy that is brewing also touches on Nomura, one of B. Riley’s biggest lenders. Nomura is trying to restore its reputation in risk management after losing about $3 billion in 2021 in the collapse of Archegos Capital Management.
An SEC spokesperson declined to comment. Exploration is in early stages. An investigation by the agency does not necessarily mean that anyone was involved in wrongdoing or that legal action will be taken, and Nomura is not the focus of the investigation.
In an emailed statement, a spokesperson for B. Riley said: “We have not received anything from the SEC regarding this matter. As long as the SEC conducts an investigation, we will fully cooperate with any regulatory investigation as we have in the past.” said. .
short seller
“We welcome the investigation into the outrageous tactics used by short sellers to destroy B. Riley, including coordinated option trading with zero disclosure requirements,” the statement said. “Short sellers continue to harass, intimidate, and insult employees and everyone associated with B. Riley by resorting to lies and abusive statements for personal gain.”
A Nomura representative said the bank declined to comment.
B. Riley told shareholders in a quarterly report with the SEC on Nov. 9 that the company has sufficient cash and other sources of liquidity to meet its needs. Mr. Khan and his lawyer did not respond to messages.
“During my previous business relationship with Prophecy, I had no knowledge that Prophecy or any of its principals were suspected of defrauding investors, nor did I conspire to defraud investors,” Khan said in a November statement. said. “Like many other investors, his relationship with Prophecy became costly, including financially, and he ceased doing business with Prophecy several years ago. This previous relationship affected the franchise group. That never happens.”
Investigators in the SEC’s Los Angeles office are also seeking information about Bebe Stores Inc., a women’s clothing chain run by B. Riley and also doing business with Mr. Khan, one of the people said.
Representatives for Bevestore did not respond to requests for comment.
Founded by Chief Executive Officer Bryant Riley, B. Riley traces its roots back to 1997 as a boutique stock picker focused on small companies. The company currently offers birth-to-death business models for small publicly traded clients, including equity and bond offerings.
franchise group
Mr. Khan has been a long-time customer of B. Riley’s and has been involved with several businesses. Last August, the bank helped him lead a management buyout of Franchise Group (FRG), a retail company based in Delaware, Ohio.
Mr. Nomura led a $600 million loan syndication to Mr. B. Reilly to help finance Mr. Khan’s acquisition, establishing the tripartite relationship that currently exists between the parties, according to loan documents reviewed by Bloomberg News. did. Japanese banks invested $240 million, more than any other financial institution, one of the people said.
According to documents, B. Riley pledged approximately $1.5 billion in various assets as collateral for the loan. The documents show that around $220 million included FRG shares, while $200 million was a loan made to Mr Khan by B. Reilly, which was itself secured by even more FRG shares. It is said that there is.
Prophecy management
Months after the FRG deal closed, an associate of Mr. Khan’s named John Hughes pleaded guilty to conspiring to defraud investors of $294 million through his now-defunct investment fund, Prophecy Asset Management. Ta.
According to an indictment filed by prosecutors in New Jersey federal court, one of Hughes’ co-conspirators was “the CEO and president of a multi-billion dollar company that owns and manages a large and diverse retail franchise.” Bloomberg previously reported that the co-conspirator was Mr. Khan, according to people familiar with the matter.
The SEC also charged Hughes with a complaint detailing massive trading losses made by Person 2. The authorities’ description of Individual 2’s alleged conduct is consistent with Khan’s description in the Hughes criminal case.
This is consistent with a civil lawsuit filed in New York in 2020 by the Prophecy Investor Group, which named Khan and others as defendants. They alleged that Mr. Khan helped them defraud tens of millions of dollars and spent more than $100 million to amass control of FRG for himself. Khan has not been charged and denies any wrongdoing.
The lawsuit was filed in federal court in New York, submitted to arbitration, and dismissed in 2022. It is not clear from court records whether a settlement was reached or whether Khan paid any money.
Read more: Archegos and Nomura’s ‘friendship’ ends with $3 billion loss
The allegations against Mr. Khan have had a ripple effect on Mr. B. Reilly’s relationship with Nomura and FRG Credit Ratings. At Nomura, a team of outside advisors warned the Tokyo-based bank that collateral for the debt may be tainted with fraud, citing allegations against Mr. Khan, and B. Reilly, according to loan documents. It has been revealed that the government urged the government to reduce the amount of the loan.
Nomura decided not to take action because of the overall strength of the loan, according to documents and one of the people.
However, on November 10, S&P Global Ratings downgraded FRG’s already-junk credit rating to B-minus, stating that its high leverage and “weak operating performance” made its high debt burden unsustainable. I warned you that this is a possibility. S&P described the allegations against Khan as an “unresolved” situation that could distract the company.
–With assistance from Jill R. Shah and Austin Weinstein.
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