B. Riley Shares Plummet 50%, FRG Drama Doesn't Bode Well For Q2: CEO

B. Riley Financial Inc. RILY shares are currently trading at around $8.08, down more than 52.54% at last check Monday, after reports circulated that its second-quarter earnings would be delayed as regulators probe the Los Angeles-based boutique bank.

Trading was temporarily halted at 9:33 a.m. E.T., but resumed around five minutes later.

What Happened: The “overwhelming majority” of B. Riley’s non-cash losses stem from its investment in Franchise Group, Inc. (FRG), according to founder and CEO Bryant Riley in a second-quarter preliminary report.

Riley’s comments coincide with a Bloomberg report detailing how the U.S. Securities and Exchange Commission subpoenaed Riley and is investigating whether his firm properly disclosed to investors the risks associated with FRG and its former CEO, Brian Kahn.

B. Riley advised Kahn on a buyout deal; it subsequently purchased a 31% stake in FRG.

See Also: US Stocks Trim Gains As Iran Mulls Attack On Israel; Gold, Oil Rally: What’s Driving Markets Monday?

Why It Matters: B. Riley shares have fallen off a cliff — down 80% since the end of 2021.

The transaction between B. Riley, Kahn and FRG is said to be problematic due to allegations levied against Kahn and his role at a hedge fund — Prophecy Asset Management.

In November, the SEC charged Prophecy President and Chief Compliance Officer John Hughes for misleading the funds' investors, auditors, and administrator about the funds' trading practices, risk, and performance — “all while collecting more than $15 million in fees.”

Kahn, who denied wrongdoing at Prophecy, stepped down from FRG in January.

Riley insists any allegations against Kahn have nothing to do with FRG, or its umbrella of retail stores.

B. Riley also “had no involvement with, or knowledge of, any of the alleged misconduct concerning Prophecy,” he added.

Nevertheless, the legal scrutiny hurt FRG’s ability to make money. Now the SEC is wondering whether B. Riley made investors sufficiently aware of the situation involving Kahn and Prophecy before inking the FRG agreement.

Nomura Holdings Inc. is also entangled in the drama. The Japanese bank arranged for B. Riley to use a $600 million loan to back the FRG acquisition; it provided $240 million worth of the debt.

B. Riley put up $1.5 billion worth of assets as collateral for the debt, including $220 million of FRG shares and a $200 million loan to Kahn (itself secured by FRG stock).

It’s not clear how Nomura is handling the loan going forward.

What’s Next: Riley reportedly told investors on Monday that he is confident the SEC probe will show that his firm had “no involvement” or knowledge of the alleged misconduct concerning Kahn.

B. Riley will also postpone publishing its quarterly earnings report. The firm previously missed two other deadlines for filing its annual report and its quarterly 10-Q filing for the first quarter of 2024.

It forecasts a steep second-quarter loss due to FRG.

Now Read:

• AMC Entertainment Stock Flirts With Golden Cross: Investors Hope For Blockbuster Rebound After Q2 Flop

[Editor’s Note: Additional information about the halt in trading was added to the article.]

Photo: Shutterstock