Shareholder sues B. Riley execs for allegedly hiding partner's $294M fraud ties

B. Riley Financial executives face accusations of concealing a business partner's alleged fraud ties while leading a $2.8 billion buyout.

A shareholder derivative lawsuit filed in the Central District of California targets B. Riley Financial's top leadership, accusing them of breaching fiduciary duties by failing to disclose material information about the company's relationship with Brian Kahn, former CEO of Franchise Group.

The case centers on B. Riley's two-decade partnership with Kahn, during which the financial services firm provided funding and support to Franchise Group and various entities under Kahn's control. In August 2023, B. Riley helped orchestrate a $2.8 billion management buyout of Franchise Group, securing financing from Nomura Holdings to allow Kahn and senior management to acquire the 64 percent stake they did not already own.

The deal soured months later. On November 2, 2023, John Hughes, President and Chief Compliance Officer of Prophecy Asset Management LP, pleaded guilty to conspiracy to commit securities fraud in connection with a $294 million investor fraud scheme. Department of Justice charging documents identified a co-conspirator as the CEO of a multi-billion dollar retail franchise company. Bloomberg subsequently identified that individual as Kahn.

The lawsuit names Co-CEOs Bryant R. Riley and Thomas J. Kelleher, Chief Financial Officer Phillip J. Ahn, and seven board members as defendants, accusing them of failing to disclose Kahn's alleged involvement in illicit activities and the regulatory risks this posed to B. Riley.

The fallout proved severe. B. Riley's stock plunged $9.02, or 22 percent, to $32.54 per share on November 6, 2023. By January 14, 2025, shares had collapsed to around $4.

Further revelations followed. On February 12, 2024, the Wall Street Journal reported a longer and closer relationship between B. Riley and Kahn than previously known. A July 2023 Nomura presentation revealed a series of undisclosed loans to Kahn, with principal balances reaching $154 million by mid-2023. The firm also lent $201 million to Kahn's investment firm, secured by Franchise Group shares.

Regulatory scrutiny intensified. Bloomberg reported in January 2024 that the Securities and Exchange Commission had conducted interviews about B. Riley's relationship with Kahn. Bryant Riley disclosed during an August 2024 conference call that both he and the company had received SEC subpoenas in July primarily related to dealings with Kahn. A November 2024 subpoena sought additional documents concerning Franchise Group, its holding company Freedom VCM Holdings, and Riley's personal loan arrangements involving pledged company shares.

B. Riley's 2023 annual report, filed April 24, 2024, revealed that auditors had identified material weaknesses in the company's internal control over financial reporting. On November 3, 2024, Franchise Group filed for Chapter 11 bankruptcy protection in Delaware.

The lawsuit asserts four claims: violations of Section 14(a) of the Securities Exchange Act for allegedly misleading proxy statements, breach of fiduciary duties, unjust enrichment, and waste of corporate assets. It accuses the defendants of failing to uphold their risk management obligations and violating the company's Code of Business Conduct and Ethics.

A related securities class action against B. Riley and Bryant Riley is pending in the same court. On December 12, 2025, Judge Sherilyn Peace Garnett partially denied a motion to dismiss, ruling that plaintiffs adequately alleged the company's failure to disclose the VCM Loan rendered its statements about the Franchise Group buyout misleading.

The lawsuit seeks damages, disgorgement of profits, and corporate governance reforms on behalf of B. Riley. No determination on the merits has been made.