Chris Christie Joins Brian Kahn Defense in Probe of Failed Fund

(Bloomberg) -- Chris Christie, the former New Jersey governor, is helping to defend Brian Kahn, a former key client of B. Riley Financial Inc., in an ongoing criminal investigation into the collapse of hedge fund Prophecy Asset Management.

Christie, who once served as US attorney in New Jersey and later ran for president, has met with prosecutors who are nearing a decision on whether to charge Kahn over the fund’s 2020 failure, according to people familiar with the matter. Kahn worked as a money manager at Prophecy. Chris Porrino, a former attorney general in New Jersey, is also defending him, said the people, who asked not to be identified discussing private conversations.

Prosecutors have convened a grand jury in Newark, New Jersey, to gather evidence as they weigh additional criminal charges related to the Prophecy case. Prophecy co-founder John Hughes pleaded guilty last November to conspiracy to commit securities fraud and is cooperating with investigators, court records show. The confidential proceedings could end without charges. 

As part of their case, prosecutors referred to Kahn as an unindicted co-conspirator in their case against Hughes, Bloomberg has reported. Kahn, the former chief executive of Franchise Group Inc., hasn’t been charged and has categorically denied wrongdoing. 

Still, his role as a money manager for Prophecy has spurred allegations by some investors that he improperly used the hedge fund to gain control of Franchise Group, or FRG. Kahn also worked with B. Riley on a $2.8 billion buyout of FRG in August 2023. That deal has since led to massive writedowns and a tumbling stock price for B. Riley. 

Neither Kahn nor Christie, who now runs a consulting and crisis management firm, responded to requests for comment. Porrino declined to comment. A spokesman for US Attorney Philip Sellinger, an attorney for Hughes and a representative for FRG also didn’t respond to requests for comment. A spokesman for Los Angeles-based B. Riley declined to comment.

FRG owns retailers including Vitamin Shoppe and Pet Supplies Plus. B. Riley helped Kahn finance the management-led buyout of FRG last year. The buyout made FRG one of B. Riley’s most important holdings, but weak performance has led to debt restructuring talks with FRG’s lenders, and B. Riley has said it expects writedowns of up to $370 million tied to the firm. B. Riley is now looking to sell assets to bolster its own finances.

SEC Probe

The US Securities and Exchange Commission is investigating whether B. Riley gave investors an accurate picture of its financial health and is seeking information on the interactions between co-founder Bryant Riley and Kahn. 

Bryant Riley has said an internal investigation has cleared him of wrongdoing. In August, he told investors he expects the SEC will conclude “that we had no involvement with or knowledge of any alleged misconduct concerning Brian Kahn or his affiliates.”

The Prophecy case involves a fund that promised a low-risk way to invest money among an array of investment advisers who would post collateral to safeguard against losses. Bloomberg reported that Kahn was one of those money managers. Kahn allegedly accumulated “massive” trading losses that Prophecy didn’t disclose to investors, according to the SEC and criminal cases against Hughes, who pleaded guilty to a $294 million securities fraud conspiracy.

Some investors sued in 2020, claiming Kahn took their money to help underwrite FRG. Kahn, who stepped down as the CEO of FRG in January, agreed to repay more than $200 million to investors, including cash and shares in Franchise Group, Bloomberg has reported.  

Prosecutors say Prophecy once had $360 million in assets under management, and Kahn was allocated 86% of them. Kahn, labeled by the Justice Department in court filings as “Co-conspirator-2,” allegedly covered his losses by using fabricated and forged documents, they said.  

That’s not true, Kahn has said. “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,”  he said in a November statement.

More stories like this are available on bloomberg.com

©2024 Bloomberg L.P.