According to sources, U.S. authorities have expanded their investigation into financial irregularities at B. Riley – even though the struggling Wall Street company suspended its dividend payment and issued a profit warning on Monday, causing the company’s share price to plummet by more than 50 percent.

In June and July, short sellers continued to provide information about B. Riley to the Securities and Exchange Commission, and the SEC has asked them for additional material as part of an ongoing investigation, according to emails and text messages seen by The Washington Post.

SEC investigators are interested in loans B. Riley may have guaranteed for his former business partner Brian Kahn, a source familiar with the situation said. In January, Kahn resigned as CEO of Franchise Group, which owns tutoring centers Vitamin Shoppe and Sylvan Learnings.

Kahn resigned after news reports linked him to Prophecy Asset Management, an investment firm that collapsed in March 2020 and that prosecutors say concealed Kahn’s trading losses. Khan has not been charged and denies any wrongdoing.

B. Riley said its second-quarter results were hurt by a write-down of its stake in Franchise Group, partly due to weak consumer spending. B. Riley suspended its dividend and forecast a second-quarter loss of $14 to $15 per share.

In a conference call with investors Monday morning, B. Riley’s co-CEO Bryant Riley confirmed that the SEC’s investigation is ongoing, responding to a Bloomberg article on Monday that said the SEC had expanded its investigation into B. Riley.

Bloomberg reported that the SEC is investigating whether B. Riley properly disclosed the risks of its Franchise Group loans and whether there may be improper trading by insiders. It also said the SEC is focusing on communications between Riley and Kahn.

“The company and I received subpoenas from the SEC in July,” Riley said. “We are cooperating fully.”

Earlier this year, B. Riley hired the law firm Winston & Strawn to investigate his relationship with Kahn. In April, the firm concluded that B. Riley had no involvement in or knowledge of Kahn’s alleged misconduct.

B. Riley shares closed 52% lower at $8.15 on Monday.

Prophecy reportedly collapsed when it was supposed to invest with several asset managers but instead invested primarily with a single one, presumably Kahn’s Vintage Capital, which lost all its money, about $300 million.

Prophecy co-founder John Hughes pleaded guilty to conspiracy to commit securities fraud in 2023 and his sentencing was recently postponed to February 5, 2025, according to court records.

There is speculation that he is cooperating with the public prosecutor’s office.

“Hughes actively misled his clients into believing they were investing responsibly by putting their money in low-risk funds,” said Richard Langham, assistant special agent in charge of the FBI’s Philadelphia Division, in a Nov. 2 press release.

“As these lies continued and losses mounted, he attempted to cover up the shocking fraud.”

The SEC declined to comment. Kahn did not respond to a request for comment.

Kahn, meanwhile, claims that he himself was a victim.

“At no time during my prior business relationship with Prophecy did I know that Prophecy or its directors allegedly defrauded their investors, nor did I participate in any fraud,” Kahn told Reuters in a statement released in November.

Kahn reportedly invested much of Prophecy’s money in purchasing shares in Franchise Group before leading a B. Riley-backed takeover of the company.

B. Riley backed Kahn’s acquisition of Franchise Group in 2023 for $2.6 million and loaned his Vintage Capital $201 million in exchange for Vintage’s stake in the company.

Riley said in the Monday morning call, “We are confident the SEC will come to the same conclusion” that in our own investigations we found that we had no knowledge of Kahn’s alleged fraud.

B. Riley’s close relationship with Kahn also included backing him with equity and debt when his firm, Vintage Capital, reached a $1.4 billion deal to buy Rent-A-Center in 2018 that then fell through.

B. Riley is a broker-dealer that invests in and lends to small-cap companies. The firm is also known for liquidating assets. It managed $26 billion in assets as of March 31, according to public filings.

The Los Angeles-based company had a successful run several years ago when it rescued struggling companies like AMC Entertainment from bankruptcy. B. Riley was adept at raising money from retail investors rather than institutional investors.

Because of his loans to the franchise group, B. Riley is now financially exposed.

On July 22, rating agency Moody’s downgraded Franchise Group’s corporate rating from B3 to Caa1, meaning its debt is at very high risk of default.

B. Riley also loaned furniture retailer Conn’s about $100 million to buy the Franchise Group’s WS Badcock brand. Conn’s filed for bankruptcy on July 23.

Short sellers have made B. Riley their favorite because they fear the company will collapse.