Brian Kahn Charged Over Collapse Of Prophecy Fund, US Says

Brian Kahn, the former head of Franchise Group Inc., was charged with conspiracy to commit securities fraud in the collapse of a hedge fund that prosecutors say cost investors $294 million.

Kahn is the third person accused of crimes stemming from the failure of Prophecy Asset Management, which US prosecutors have characterized as "a multi-year investment adviser fraud," according to an Aug. 12 filing made public last week in federal court in Trenton, New Jersey.

Kahn was charged over "the same events that form the basis" of a guilty plea by John Hughes, a Prophecy co-founder, according to the Justice Department letter informing the court clerk about the developments.

Investors have been watching the case amid accusations in a civil lawsuit that Kahn used Prophecy money to acquire control of Franchise Group, or FRG, which subsequently went bankrupt. FRG was one of the biggest investments of B. Riley Financial Inc., whose shares plummeted as FRG unraveled.

Prosecutors charged Kahn through a criminal information, a document that typically precedes a guilty plea. A prosecutor said at a hearing last month that more people will plead guilty over the Prophecy collapse.

An attorney for Kahn didn't immediately respond to a request for comment. Another Kahn lawyer previously said that Kahn didn't do anything wrong and that he was a victim of Prophecy's demise in 2020. The charging document had not been publicly filed by midday on Monday.

Kahn is represented by a private attorney appointed under the Criminal Justice Act, which covers indigent defendants.

Meanwhile, Kahn has lived outside Orlando on a two-acre estate that once belonged to baseball superstar Ken Griffey Jr. On Sept. 11, he listed the mansion for sale for $13 million. It includes an Olympic sized swimming pool, a 912-bottle wine cellar and sweeping views of Lake Louise, according to a listing by Zillow.

Kahn led FRG as a public company before its management-led buyout in 2023 for $2.8 billion. Weeks later, Hughes pleaded guilty and prosecutors deemed Kahn an unindicted co-conspirator, touching off a scandal that forced him to step down as chief executive. FRG, a collection of furniture chains, vitamin stores and pet supplies, filed for bankruptcy in November 2024.

The turmoil engulfed B. Riley, whose Chairman Bryant Riley had been Kahn's partner in several business ventures. Riley helped Kahn form and finance FRG, and its bankruptcy erased much of B. Riley's market value. B. Riley has said it wasn't involved in the Prophecy episode. Bryant Riley told Bloomberg News in a September interview that he feels betrayed and is angry at his old partner, Kahn. "I don't like saying his name, honestly," he said.

B. Riley didn't immediately respond to a message seeking comment. The firm has been dogged by short-sellers who claim B. Riley failed to fully disclose the nature of its relationship with Kahn.

"It's great to see that Brian Kahn was charged in the Prophecy fraud," Marc Cohodes, a short-seller who has attacked FRG, B. Riley and its executives, said in an email. "Justice takes time, but eventually it is served."

Prophecy told investors that their money went into "highly liquid" US equities traded by dozens of sub-advisers who had to put up cash collateral to cover their losses. In reality, the vast majority went to Kahn, who "incurred massive trading losses far exceeding the amount of cash collateral he had contributed to Prophecy," according to an earlier US Securities and Exchange Commission lawsuit against him. Prophecy put money into "highly illiquid investments," including in entities that Kahn controlled, after performing "little to no due diligence," the SEC claimed.

The Aug. 12 letter was signed by Deputy Attorney General Todd Blanche, the No. 2 official in the Justice Department, and Alina Habba, the acting US attorney in New Jersey. They suggested that the Kahn case should be assigned to US District Judge Michael Shipp, who is handling the Hughes case.

In pleading guilty, Hughes agreed to cooperate with prosecutors. Another Prophecy executive, Jeffrey Spotts, has been charged with conspiracy and fraud in a four-count indictment and faces a January trial in Shipp's courtroom.

Source: Bloomberg Europe