B. Riley Financial Inc. (RILY) saw its stock plunge by 50% on Monday after the investment bank announced substantial losses for its second fiscal quarter. 

The dramatic decline is tied to the fallout from a troubled investment in Franchise Group (FRG) last year, which has severely impacted the company’s financial standing and led to the suspension of dividend payments.

Massive Q2 losses due to Franchise Group investment

In a press release on Monday, B. Riley Financial revealed that it expects to report a quarterly loss ranging from $435 million to $475 million, primarily due to a failed investment in Franchise Group. 

This loss includes a $370 million markdown on the investment, which translates to a loss of up to $15 per share for the quarter. 

The severity of these losses has understandably shaken investor confidence, leading to the sharp decline in the stock price.

B. Riley’s troubles began when it issued a loan to Brian Kahn, the former CEO of Franchise Group, to facilitate his move to take the retail chain owner private in 2023. 

As part of this transaction, B. Riley became one of the largest shareholders of FRG, holding a 31% stake. 

However, the deal quickly turned sour as Kahn became embroiled in allegations related to the collapse of Prophecy Asset Management, an unrelated hedge fund.

Although the allegations against Kahn do not directly involve Franchise Group, they have significantly hampered B. Riley’s ability to manage its investment. 

According to Bryant Riley, the founder of B. Riley Financial, these issues have affected the execution of Franchise Group’s business strategy, including its ability to divest or monetize certain assets. 

As a result, B. Riley’s investment in FRG has suffered, contributing to the significant quarterly losses.

The stock, which has now fallen approximately 80% from its year-to-date high in late April, continues to face pressure as the company struggles to recover from this misstep.

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SEC scrutiny 

Adding to B. Riley’s woes, the US Securities & Exchange Commission (SEC) subpoenaed the company and its founder Bryant Riley on Monday regarding their ties to Brian Kahn. 

The SEC’s investigation further intensifies the uncertainty surrounding B. Riley’s future, as regulatory scrutiny could lead to additional challenges for the firm.

Despite the ongoing investigation, Bryant Riley reassured investors during a call that the company expects the SEC to conclude that B. Riley had no involvement in or knowledge of any alleged misconduct concerning Brian Kahn or his affiliates. 

Kahn himself has denied any wrongdoing and claims to have lost money in the collapse of Prophecy Asset Management.

B. Riley’s to refocus on its core financial services

In response to the mounting challenges, B. Riley Financial has announced plans to refocus on its core financial services business and support its valued clients, as it has done for the past 27 years. 

This strategic pivot is aimed at stabilizing the company and regaining investor confidence following the disastrous FRG investment and the subsequent stock market fallout.

Short sellers have targeted B. Riley stock due to its association with Brian Kahn and the series of failed acquisitions over the past year. 

The company’s management is now tasked with navigating these turbulent waters while attempting to restore its reputation and financial health.

As B. Riley grapples with the consequences of its investment decisions, the coming months will be critical in determining whether the company can recover from this setback and rebuild trust with its investors.

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