Investor pleads guilty in criminal case that felled hedge fund, damaged B. Riley

Businessman Brian Kahn has pleaded guilty to conspiracy to commit securities fraud in a case that brought down a hedge fund, helped lead to the bankruptcy of a retailer and damaged West Los Angeles investment bank B. Riley Financial.

Kahn, 52, admitted in a Trenton, N.J., federal court Wednesday to hiding trading losses that brought down Prophecy Asset Management in 2020. The Securities and Exchange Commission alleged the losses exceeded $400 million.

An investor lawsuit has accused Kahn of funneling some of the fund’s money to Franchise Group, a Delaware retail holding company assembled by the investor that owned Vitamin Shoppe, Pet Supplies Plus and other chains.

B. Riley provided $600 million through debt it raised to finance a $2.8-billion management buyout led by Kahn in 2023. It also took a 31% stake in the company and lent Kahn’s investment fund $201 million, largely secured with shares of Franchise Group.

Kahn had done deals with B. Riley co-founder Bryant Riley before partnering with the L.A. businessman on Franchise Group.

However, the buyout didn’t work out amid fallout from the hedge fund scandal and slowing sales at the retailers. Franchise Group filed for bankruptcy in November 2024. A slimmed-down version of the company emerged from Chapter 11 in June.

B. Riley has disclosed in regulatory filings that the firm and Riley have received SEC subpoenas regarding its dealings with Kahn, Franchise group and other matters.

Riley, 58, the firm’s chairman and co-chief executive, has denied knowledge of wrongdoing, and an outside law firm reached the same conclusion.

The failed deal led to huge losses at the financial services firm that pummeled B. Riley’s stock, which had approached $90 in 2021. Shares were trading Friday at $3.98.

The company has marked down its Franchise Group investment, and has spent the last year or so paring debt through refinancing, selling off parts of its business and other steps, including closing offices.

The company announced last month it is changing its name to BRC Group Holdings in January. It did not immediately respond to requests for comment.

At Wednesday’s plea hearing, Assistant U.S. Atty. Kelly Lyons said that Kahn conspired to “defraud dozens of investors who had invested approximately $360 million” through “lies, deception, misleading statements and material omissions.”

U.S. District Judge Michael Shipp released Kahn on a $100,000 bond and set an April 2 sentencing date. He faces up to five years in prison. Kahn, his lawyer and Lyons declined to comment after the hearing.

Kahn is the third Prophecy official charged over the hedge fund’s collapse. Two other executives, John Hughes and Jeffrey Spotts, have also been charged.

Hughes pleaded guilty and is cooperating with prosecutors. Spotts pleaded not guilty and faces trial next year. The two men and Kahn also have been sued by the SEC over the Prophecy collapse.

Bloomberg News contributed to this report.