B. Riley Must Face Investor Fraud Suit Over Brian Kahn Dealings

B. Riley Financial Inc. and chairman Bryant Riley must defend against allegations they misled investors over undisclosed risky loans to the former CEO of Franchise Group Inc., which the investment bank backed in a $2.8 billion take-private deal.

The investors sufficiently alleged B. Riley’s co-founder acted with deliberate recklessness to sustain their securities fraud claims given his close relationship with ex-FRG CEO Brian Kahn, Judge Sherilyn Peace Garnett said. Kahn last week pleaded guilty to defrauding hedge fund investors of about $300 million.

Riley’s abrupt resignation from FRG’s board, personal involvement in its 2023 management buyout, and Kahn’s importance to B. Riley’s business raised an inference the chairman was aware of Kahn’s alleged fraud, the US District Court for the Central District of California judge said. The pair’s close relationship, the size of the loans, and the unusual nature of a key one implied Riley knew about those loans.

But investors failed to adequately allege a compelling inference of two other executives’ level of intent or recklessness, Garnett said while dismissing securities fraud claims against them. The investors can replead one more time within 21 days to address shortcomings identified in her order entered Monday.

The shareholders adequately pleaded B. Riley’s disclosures misled them over its financial exposure to a Kahn entity and that the investment bank’s failure to disclose the key loan rendered statements about FRG’s debt-fueled buyout misleading. The investors adequately pleaded loss causation over a stock decline at least partly driven by revelations of B. Riley’s financial exposure to Kahn-related entities, Garnett said.

Investors in the proposed class action said B. Riley took on undisclosed risks by investing alongside Kahn and offering generous margin loans to his businesses.

In 2017, Kahn started sustaining and covering up large trading losses as an adviser to Prophecy Asset Management LP, a hedge fund that ultimately collapsed in 2020. Prophecy’s fallout and FRG’s 2024 bankruptcy roiled B. Riley’s finances and share prices—forcing it to write down the value of its loans and investments, contend with the threat of a Nasdaq delisting, and face a US Securities and Exchange Commission civil investigation into its dealings with Kahn.

Kahn’s Plea

Kahn, the third officer charged over the hedge fund’s collapse, pleaded guilty to conspiring to commit securities fraud at Prophecy.

Surrounding the collapse, Kahn was building FRG, the owner of brands like Vitamin Shoppe and Pet Supplies Plus. FRG went private in 2023 and filed for bankruptcy in 2024 as losses grew and Kahn drew accusations tied to Prophecy.

Pomerantz LLP is lead counsel for the proposed class, which targets those who acquired B. Riley securities from Feb. 22, 2022, through Nov. 1, 2024. Sullivan & Cromwell LLP represents B. Riley, Riley, co-CEO Tom Kelleher, and former Chief Financial Officer Phillip Ahn. Neither of these law firms nor B. Riley immediately responded to emails seeking comment.

The case is In re B. Riley Fin., Inc. Sec. Litig., C.D. Cal., No. 2:24-cv-00662, partial dismissal entered 12/15/25.