Businessman Brian Kahn has pleaded guilty to conspiracy to commit securities fraud in a case that brought down a hedge fund, led to the bankruptcy of a retailer and damaged West Los Angeles investment bank B. Riley Financial.
Khan, 52, admitted Wednesday in federal court in Trenton, New Jersey, that he hid trading losses that led to the collapse of Prophecy Asset Management in 2020. Losses exceeded $400 million, the Securities and Exchange Commission claimed.
The investor lawsuit accuses Mr. Khan of funneling some of the fund’s money to Franchise Group, a Delaware retail holding company founded by investors that owns chains such as Vitamin Shoppe and Pet Supply Plus.
B. Riley provided $600 million through debt raised to fund Mr. Khan’s company in 2023. It also acquired a 31% stake in the company and lent Mr. Khan’s investment fund $201 million, secured largely by Franchise Group stock.
Kahn worked with B. Riley co-founder Bryant Riley before partnering with the Los Angeles businessman on the franchise group.
However, the deal fell through due to the fallout from the hedge fund scandal and weak retail sales. Transitioned to a franchise group in November 2024. A slimmed-down version of the company emerged from Chapter 11 in June.
B. Riley disclosed in a regulatory filing that the company and Riley received SEC subpoenas regarding transactions with Khan and Franchise Group and other matters.
Riley, 58, the firm’s chairman and co-chief executive officer, has denied knowledge of any wrongdoing, and an outside law firm has reached a similar conclusion.
A failed deal with a financial services company sent B. Riley stock plummeting from near $90 in 2021. The stock was trading at $3.98 on Friday.
The company has pared down its investments in franchise groups and spent the past year or so refinancing its operations and paying off debt through other measures, including office closures.
The company announced last month that it would change its name to in January. He did not immediately respond to a request for comment.
At Wednesday’s plea hearing, Assistant US Atty. Kelly Lyons said Khan conspired to “defraud dozens of investors who invested approximately $360 million” through “lies, deceptions, misleading statements and material omissions”.
U.S. District Judge Michael Shipp released Khan on $100,000 bail and set a sentencing date for April 2.. He could face up to five years in prison. Khan, his attorney and Lyons declined to comment after the hearing.
Mr. Khan is the third person connected to Prophecy to be indicted in connection with the hedge fund’s collapse. Two other executives, John Hughes and Jeffrey Spotts, were also indicted.
Hughes has pleaded guilty and is cooperating with prosecutors. Spotts has pleaded not guilty and is scheduled to go to trial next year. The two men and Mr. Khan are also being sued by the SEC over the collapse of the prophecy.
Bloomberg News contributed to this report.
