Pomerantz Secures Important Win in Case Against B. Riley Financial

On December 12, 2025, Pomerantz achieved an important win for investors in a securities fraud class action against California-based investment bank and financial services firm B. Riley Financial (now BRC Group Holdings) and its founder and co-CEO Bryant Riley by largely defeating a motion to dismiss. The case is led by partner Justin D. D’Aloia and captioned In re B. Riley Financial, Inc. Securities Litigation, No. 24-cv-00662 (C.D. Cal.).

The case arose from a series of undisclosed loans that B. Riley extended to longtime business partner and company friend, Brian Kahn. Kahn is a Florida-based private equity investor who was one of B. Riley’s earliest and largest clients. As B. Riley grew into a sophisticated financial services firm, it—in contrast to many other investment banks—made a name for itself by investing alongside its clients in various debt and equity opportunities on a “principal basis,” meaning with money from its own balance sheet. B. Riley entered into several such transactions with Kahn, including one in 2019 to acquire a controlling interest in publicly-traded franchise owner/operator Liberty Tax. Kahn was appointed as CEO and renamed the company Franchise Group (FRG). Over the next year, B. Riley and Kahn, in particular, continued to invest more money in FRG, and FRG, in turn, used that capital to acquire a series of consumer franchise businesses, including Vitamin Shoppe, Sylvan Learning, and Pet Supplies Plus, to name a few. As Kahn was growing his ownership stake in FRG, B. Riley also deployed its balance sheet to extend Kahn a series of “margin loans” secured by shares that Kahn personally owned.

During this time, Kahn was at the center of a multiyear fraud that resulted in the collapse of the hedge fund Prophecy Asset Management (PAM). Kahn served as one of PAM’s “sub-advisors” responsible for investing money allocated to him. Kahn incurred hundreds of millions in investment losses and apparently diverted up to $160 million to secure his controlling interest in FRG. Rather than requiring Kahn to post appropriate collateral for the losses he sustained, PAM’s principals conspired to hide the losses through a series of fraudulent transactions, including “round trip” cash transfers, forged stock certificates, and other brazen tactics. By March 2020, Kahn’s losses totaled more than $400 million and the fund collapsed.

Kahn’s implication in this fraud—and the significant liabilities he owned as a result—were no secret. Several groups of investors filed lawsuits against Kahn to recover their investments, one of which attached emails from PAM’s CEO informing investors that the fund had initiated an arbitration proceeding against Kahn to recover all the money he lost. By July 2022, Kahn agreed to repay nearly $300 million in connection with the arbitration and pledged certain shares of FRG owned by an affiliate as collateral to secure the liability. Incredibly, B. Riley continued to extend loans to Kahn even after this information was public. By early 2023, the loans outstanding to Kahn totaled more than $150 million and were secured by all of Kahn’s equity interests in FRG.

Meanwhile, FRG’s portfolio businesses struggled to remain profitable as the COVID-19 pandemic subsided, and Kahn began exploring ways to liquidate his stake in FRG to pay his outsized liabilities. Following a series of meetings with Bryant Riley, B. Riley agreed in May 2023 to finance a “management-led buyout” pursuant to which a group of investors led by Kahn, including B. Riley, agreed to take FRG private. B. Riley told its investors that it agreed to raise up to $560 million for the transaction but that its own investment would be “substantially less.”

The FRG buyout closed in August 2023. Those who participated in the transaction, including Kahn and B. Riley, agreed to convert their existing shares of FRG into shares of a privately-owned holding company known as Freedom VCM. B. Riley ultimately invested over $280 million in the new entity. Unbeknownst to investors, however, B. Riley amended and restated its loan agreement with Kahn that same day to reflect the fact that Kahn’s loan balance increased to more than $200 million in connection with the transaction—the single largest receivable in its loan portfolio—and was now secured by all of his interests in Freedom VCM. Notably, the loan was designed to be repaid solely through dividends paid by Freedom VCM or foreclosure on the Freedom VCM shares posted as collateral.

Investors began to learn the truth in late 2023. In November 2023, one of PAM’s principals entered a plea deal for his involvement in the PAM fraud, and investors quickly identified Kahn as an unnamed co-conspirator in the charging documents. B. Riley accelerated an investor conference and revealed its secret $200 million loan to Kahn.

The news surrounding Kahn severely impacted privately-owned FRG and, in turn, B. Riley. Kahn soon resigned as CEO of FRG. FRG ultimately filed for bankruptcy and B. Riley was forced to write off $490 million in investments tied to Freedom VCM, including the loan to Kahn. B. Riley and Bryant Riley have been subject to an ongoing investigation by the SEC. B. Riley was unable to timely file its quarterly and annual reports with the SEC. Its dividend was suspended. And it began spinning off business divisions to stay afloat and, ultimately, changed its name to BRC Group Holdings.

This series of events was equally catastrophic for those invested in B. Riley. Those who bought B. Riley common stock saw it tumble from a high of $72 in March 2022 to $5.70 in November 2024. Similarly, investors who bought B. Riley’s “baby bonds” experienced a peak-to-trough decline of 54.4%.

Following an extensive investigation, Pomerantz filed a detailed Amended Complaint on behalf of these investors which alleged that the parties named therein made a series of misstatements between February 2022 and November 2024 on numerous topics, including: (1) GAAP compliance; (2) risk concentration; (3) investment correlation; (4) B. Riley’s loan diligence practices; (5) B. Riley’s investment in the FRG buyout; and (6) the risks associated with Kahn after the guilty plea.

In its December 12, 2025 Order, the Court sustained nearly all the claims brought on behalf of investors. The Court expressly declined to “parse” the alleged misstatements because, at a minimum, the Amended Complaint adequately alleged that B. Riley’s disclosures concerning the FRG buyout were misleading. In particular, the Court agreed that “investors could reasonably believe” from the disclosures provided that “the Company could lose $280million from its investment in Freedom VCM,” not $480 million, and gave the impression “the Company had far less exposure to Freedom VCM than it did.” The Court also held that it could infer that Bryant Riley acted with scienter—the required mental state—from the detailed facts set forth in the Amended Complaint, including his close relationship with Kahn, the size of the loans extended to Kahn, and Riley’s personal involvement in all business transactions with him, including the FRG buyout. Finally, the Court found that defendants waived any challenge to the “scheme” claims brought in the Amended Complaint for conduct other than statements by failing to raise any argument for why they should be dismissed in their opening brief.

The case is now proceeding into discovery. The victory represents a significant step forward for investors seeking accountability from corporations for misleading disclosures.