Former Franchise Group (FRG) chief executive Brian Kahn has pleaded guilty to participating in a years-long scheme that defrauded hedge fund investors of roughly $300m, a scandal that ultimately helped bring down both Prophecy Asset Management and FRG, according to a report by Bloomberg.
Kahn admitted in a New Jersey federal court that he secretly acted as Prophecy’s primary trader between 2017 and early 2020, despite the fund marketing a diversified, multi-manager platform with more than 30 sub-advisers. Prosecutors said Kahn in reality controlled nearly 80% of Prophecy’s $1bn in leveraged capital, and concealed mounting losses through forged documents, fabricated collateral and misleading statements to auditors and investors.
Prophecy collapsed in 2020, triggering years of litigation and regulatory scrutiny. Kahn later built FRG into a publicly listed retail holding company, which went private in 2023 in a $2.8bn transaction backed by B Riley Financial. FRG filed for bankruptcy the following year after revelations about Kahn’s activities at Prophecy raised questions over his finances, contributing to severe pressure on B Riley, which remains under SEC investigation.
At the plea hearing, prosecutors detailed how Kahn hid a cash collateral deficit that reached $194m by late 2019, and took short-term loans – including a one-day $25m facility – to mask his shortfalls. He also admitted promising to contribute FRG shares to cover the deficit, but never doing so.
Kahn, 52, faces a maximum sentence of five years and was released on a $100,000 bond ahead of a 2 April hearing. He is the third Prophecy executive charged; one has pleaded guilty and is cooperating, while another awaits trial. Parallel SEC actions remain ongoing.
