While Kahn was busy assembling Franchise Group with help from Riley, he was also involved in another business: Prophecy Asset Management, a hedge fund with offices in New York and South Carolina.
The fund was set up to provide investors with solid but safe returns, with assets spread out among “sub-advisors” whose investments were tracked and who were required to reimburse the fund for initial losses.
In March 2020, however, the fund collapsed because of heavy losses. A lawsuit filed under seal alleged Kahn, as a sub-advisor, had controlled as much as 86% of the fund’s $363 million in assets and that much of the money was used to acquire shares and take a controlling position in Franchise Group.
The lawsuit was dismissed and unsealed two years later. Kahn denied wrongdoing but settled for about $70 million in arbitration, Bloomberg News reported.
Kahn and his attorney did not respond to requests for comment.
The fund’s collapse and investor losses of $294 million sparked a criminal investigation by the Department of Justice. John Hughes, the fund’s co-founder, pleaded guilty Nov. 2 to conspiracy to commit securities fraud.
Hughes was charged by federal prosecutors with hiding massive trading losses with two unindicted co-conspirators, including one described as the “CEO and President of a multi-billion dollar company that owned and managed large and diversified retail franchises.”
That same day, the Securities and Exchange Commission filed civil charges in the case against Hughes, alleging that Vintage played a role in the alleged fraud, though it is not named as a defendant. Kahn has not been charged.
After Hughes entered his plea, Kahn issued a statement to Bloomberg saying that “at no time during my former business relationship with Prophecy did I know that Prophecy or its principals were allegedly defrauding their investors, nor did I conspire in any fraud.”
Bryant Riley of B. Riley Financial.
(Ringo Chiu)
That day, during his firm’s third-quarter conference call, Riley expressed faith in Kahn’s profession of innocence. “That’s good enough for me,” Riley said. “I believe we are going to make a lot of money for our shareholders.”
Riley, who has not been accused of any involvement in the fraud, also defended the investment in Franchise Group.
But the earnings announcement disclosed that B. Riley had marked down the value of its equities portfolio, contributing to a $75.8-million quarterly loss.
S&P Global also dropped Franchise Group’s debt ratings further to junk status.
“These investments they’ve made are bad, but [Franchise Group] is the Titanic,” said Marc Cohodes, a short seller who declined to disclose the size of his position in B. Riley.
Riley said he personally knows nothing about what happened at Prophecy, and regrets making such a forceful statement defending Kahn.
“It’s my nature if I know you and I’ve known you for a long time, and I’ve seen you do nothing but ethical stuff — I just didn’t believe it,” said Riley, who added that while he was friendly with Kahn, he never considered him more than a business associate.
