B. Riley shares plummet after investment losses, ratings downgrade on Franchise Group

(This Nov. 13 story has been corrected by removing a reference to mark down in value of investment in Franchise Group (NASDAQ:FRG) in paragraph 2)

By Chibuike Oguh

NEW YORK (Reuters) - Shares of financial services firm B. Riley plummeted nearly 35% on Monday, extending losses for the fourth consecutive session, after it disclosed unrealized investment losses and S&P Global Ratings downgraded a key asset.

The boutique Los Angeles-based investment bank said last week it was forced to mark down the value of its equities portfolio resulting in a net loss of $75.8 million in the third quarter, compared with a profit of $45.8 million a year earlier.

S&P Global Ratings also downgraded the credit rating of Vitamin Shoppe owner Franchise Group Inc on Friday, following a $2.6 billion take-private deal involving a consortium of investors including B. Riley.

The ratings agency slashed Franchise Group's debt rating, dropping it further down in junk status to 'B-' from 'B' with a negative outlook, after the company reported a decline in revenue and a net loss in the third quarter.

B. Riley's stock plunged to as low as $16.65 on Monday, shedding nearly 50% of its value since the announcement. Its shares have pared some of those losses and were last down nearly 14% to $21.90.

"We do not believe that the recent movement in our share price is warranted based on the fundamental strength and performance of our diversified platform," a B. Riley spokesperson said in a statement.

S&P also said it was monitoring legal developments relating to Franchise Group's Chief Executive Brian Kahn, who led the August take-private deal.

Bloomberg reported this month that Kahn is one of two co-conspirators named by co-founder of hedge fund Prophecy Asset Management John Hughes, who this month pleaded guilty to securities fraud. It's unclear if Kahn is also facing charges, Bloomberg reported.

"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 statement to Reuters.

Bryant Riley, B.Riley's eponymous CEO, said during an analyst earnings call last week that it had invested in Franchise Group based on the fundamentals of the business and that Kahn had no "direct experience with what has been alleged."

B. Riley has also been targeted by a short seller. In February, Wolfpack Research accused the company of not cutting losses on "failing" investments and continuing to extend capital to distressed clients.

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"Although B Riley attempted to address short seller concerns on their recent earnings call, the information they provided was limited," said Rick Meckler, partner at Cherry Lane Investments.

"It remains to be seen whether this is a real problem for RILY, but investors and clients sometimes don't wait around for greater clarity," Meckler added.