The plot thickens for players in the Conn’s-Badcock deal

Since the late-December acquisition of Badcock by Conn’s, the dark clouds have been gathering over the principal players in the deal, including the seller, Franchise Group, and FRG’s financial backer, Los Angeles-based B. Riley Financial. 

Reuters is reporting that FRG’s CEO, Brian Kahn, resigned late last week. The SEC announced an investigation of B. Riley and its dealings with FRG, and at least one law firm in California has filed a securities fraud lawsuit against B. Riley. 

As reported by Home News Now, Woodlands, Texas-based Conn’s acquired Badcock from FRG in an all-stock deal a mere 25 months after FRG bought the chain for $580 million and just four months after B. Riley helped FRG go private. 

On Wednesday, Reuters reported that Andrew Laurence had been named Kahn’s replacement at FRG, and the change is already reflected on the FRG website. Previously, Laurence was executive vice president and an FRG board member. 

Oddly, the change at the top at FRG was not announced; FRG merely alerted lenders on a conference call, according to the Reuters report. Bloomberg reported that Kahn’s exit has been in the works “for some time,” or before the SEC began investigating Kahn’s business deals with B. Riley. In addition, the website for Kahn’s private equity firm, Vintage Capital Management, was taken down sometime in the past two weeks.

Laurence has been a partner with Kahn in Orlando-based Vintage Capital Management since 2009.

SEC attention

It is B. Riley’s many connections to Kahn and to FRG that has the SEC probing, according to reporting published by Bloomberg.

B. Riley was an investor in FRG when it launched in June 2019. Then, in August last year, B. Riley helped the FRG senior management team led by Kahn to buy out the company in a deal worth $2.6 billion, a transaction that saw B. Riley invest about $281 million, according to a report in Mergers & Acquisitions Online.  

B. Riley also advised on the sale-leaseback of 35 Badcock retail locations and all three Badcock distribution centers. 

The darkest of the clouds concerns Prophecy Asset Management. Bloomberg reported in November that John Hughes, co-founder of Prophecy, admitted to defrauding clients of nearly $300 million. In pleading guilty, Hughes named two co-conspirators, but their identities have not been made public. Bloomberg has reported, however, that Kahn is believed by prosecutors to be one of the two. 

“At no time during my former business relationship with Prophecy did I know that Prophecy or its principals were allegedly defrauding their investors, nor did I conspire in any fraud,” Kahn said in a November statement. “Like many other investors, my relationship with Prophecy was costly, including economically, and I ceased doing business with Prophecy several years ago. In no way, shape or form has this previous relationship impacted Franchise Group.”

For its part, B. Riley issued a statement last weekend declaring that it was unaware of any SEC probe into its dealings. Nonetheless, B. Riley’s stock price took a beating last week, dropping 6.5% on Tuesday and trading on Thursday at just $20.20. The 52-week high is $60.72. 

Going to court

B. Riley’s mounting troubles also include a class action lawsuit filed in U.S. District Court in California. The case, Coan v. B. Riley Financial, is being brought by Frank R. Cruz on behalf of people and institutions who purchased B. Riley common stock between May 10 and Nov. 9 last year, according to a press release issued by the law firm. 

Nov. 9 is the end date for the action because on that day B. Riley revealed the details of its involvement in FRG’s buyout and, according to Bloomberg, “the yearslong series of complex financial transactions between B. Riley, Kahn and the company’s respective subsidiaries.” On news of the disclosures, B. Riley’s share price dropped 15% to $25.60. 

Just three days prior to B. Riley’s revelations, on Nov. 6, B. Riley’s stock price dropped 22% on news of Kahn’s Bloomberg-reported connection to Prophecy, and by Nov. 13, the share price stood at just $22.01.

The class action filing claims that throughout the period May to November last year, B. Riley “made materially false and/or misleading statements, as well as failed to disclose material adverse facts about the company’s business, operations and prospects,” according to a press release from the Frank R. Cruz law firm. 

Specifically, the filing claims that B. Riley failed to disclose to investors that Kahn had been implicated in a conspiracy to defraud investors, that in spite of this involvement, B. Riley continued to finance the transaction, enabling Kahn and others to take FRG private, and that B. Riley’s positive statements about its business, operations and prospects were materially misleading.

According to Bloomberg, the SEC “carried out interviews in recent months” about B. Riley’s dealings with Kahn, but Bloomberg’s sources insisted on anonymity. A spokesperson for the SEC declined to comment. 

B. Riley told Bloomberg in an email: “We have not received anything from the SEC on this matter and to the extent the SEC makes an inquiry, we would fully cooperate as we have done in the past on all regulatory inquiries.” 

None of this should materially affect Conn’s or Badcock, which each have difficulties of their own. Posting to the pinboard analysis of many of these financial connections and maneuverings, an “anonymous disgruntled Conn’s employee” wrote: “I may have some info to point you in a direction. Look into Lee Wright. He was a previous CFO/COO of Conn’s then went to CCO of FRG, then CEO of VitaminShoppe, which is owned by FRG. Very strange. I work for Conn’s actually and of course they won’t tell you we just had layoffs. … Doesn’t sound like a company financially strong enough to buy another.”

According to Wright’s LinkedIn page, he has been CEO at the Vitamin Shoppe since May last year, when FRG acquired the company and took it private. Prior to that, he was chief commercial officer at FRG from Jan. 2022 to May 2023, and CEO at Conn’s from May 2019 to Feb. 2021. 

Just for funsies

In doing research for this story and for the pinboard analysis earlier this month, I came across a couple of news articles that mentioned a Brian Kahn as owner of the Brockton (Massachusetts) Rox minor league baseball team. The Brockton Enterprise newspaper quotes Kahn as saying that he is proud to “to sponsor another summer season of Brockton Rox baseball at Campanelli Stadium in 2024.” 

This same Kahn owns the Chowdaheads and Windy City (Illinois) ThunderBolts ball clubs, as well. FRG’s Kahn went to Yale, so it’s not impossible that these Kahns are one and the same. I do know, however, that if the Chowdaheads were ever to play the Rox, it would be a Kahn game. Ha!