(Bloomberg) - The US Securities and Exchange Commission sued Brian Kahn, the former head of Franchise Group Inc., over the collapse of a hedge fund that he helped run, and federal prosecutors criminally charged another executive in the matter.
The case involves “a multi-year investment adviser fraud” orchestrated by Kahn and other executives that cost investors more than $350 million, according to court papers filed by the SEC on Monday in Trenton, New Jersey.
Prophecy Asset Management, Kahn and fund co-owner Jeffrey Spotts deceived investors by falsely claiming they were putting their money into a low-risk investment fund, according to the SEC. Instead, the fund and its executives “used fabricated documents” to mask a series of sham transactions, the SEC claimed.
Spotts, 58, was also charged in an indictment unsealed Monday with wire fraud, securities fraud and two conspiracy counts, according to his attorney Lee Vartan. He pleaded not guilty on Monday in Trenton federal court, Vartan said. The indictment wasn’t immediately available in electronic court records.
A spokesperson for Alina Habba, the acting US attorney in New Jersey, didn’t respond to a request for comment.
Prophecy Collapse
The allegations in the SEC case closely resemble claims filed by the agency in November 2023 against another fund co-owner, John Hughes, 58. He pleaded guilty to a criminal charge of conspiring to commit securities fraud in the Prophecy case, and is cooperating with the investigation. Prosecutors have said Kahn was an unindicted co-conspirator in the 2020 collapse of Prophecy, which he denies.
“Jeff Spotts is an investment professional of the highest caliber,” Vartan said in a statement. “Mr. Spotts has worked tirelessly to undo the wrongs committed by his former partner, John Hughes, against the Prophecy Fund. John Hughes pleaded guilty. Jeff Spotts did not and looks forward to being fully vindicated in court.”
Kahn’s alleged role touched off a scandal that engulfed B. Riley Financial Inc. and its chairman Bryant Riley, who had been his partner in several business ventures and helped him form Franchise Group, a now-bankrupt collection of furniture chains, vitamin stores and pet supplies. Attorneys in a civil lawsuit alleged that Kahn used money from the Prophecy fraud to help finance Franchise Group.
Attorneys for Kahn didn’t immediately respond to requests for comment. Kahn has insisted he did nothing wrong and that he was among the victims of Prophecy’s collapse.
Kahn’s Exit
Kahn, 52, exited under pressure as chief executive of Franchise Group in January 2024 as the firm was imploding. B. Riley had helped Kahn stage a management-led buyout in 2023 of Franchise Group, which became one of B. Riley’s biggest holdings. Franchise Group’s subsequent bankruptcy in 2024 led to massive losses for B. Riley.
Riley and his firm received civil subpoenas from the SEC. He has said he didn’t do anything wrong and knew nothing about Kahn’s activities at Prophecy.
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 the SEC lawsuit.
Prophecy put money into “highly illiquid investments,” including in entities that Kahn controlled, after performing “little to no due diligence,” the SEC claimed.
By David Voreacos
With assistance from Chris Dolmetsch
