(Reuters) – B. Riley Financial’s shares plunged 15% in premarket trading on Monday, after Franchise Group, a company in which the bank has a substantial investment, filed for bankruptcy protection.
The bank’s stock has struggled this year amid investor concerns about its exposure to Franchise Group. These worries intensified in August when B Riley warned its investment in the Vitamin Shoppe-owner could lead to a writedown and losses for the second quarter ending June 30.
Franchise Group said on Sunday it has commenced voluntary Chapter 11 proceedings in the U.S. Bankruptcy Court for the District of Delaware.
It went private last year in a management-led buyout backed by B. Riley. The deal had attracted scrutiny from shareholders and regulators.
B. Riley did not respond to a Reuters request for comment outside business hours.
The bank had warned in August it could report a markdown of $330 million to $370 million in the second quarter related to the investment.
At the time, the bank had said the write-down was driven by a “confluence of recent events”, including the impact of a meaningfully weaker consumer spending environment on Franchise’s businesses and its investments.
In July, B. Riley and its CEO received subpoenas from the SEC, primarily related to the bank’s dealings with Franchise’s former CEO, Brian Kahn.
Bloomberg News reported in November that Kahn was a co-conspirator in a securities fraud involving Prophecy Asset Management.
Kahn has denied the allegations made in the report, saying he never knew Prophecy Asset was allegedly defrauding investors.
An external investigation and an internal review earlier this year cleared B. Riley of any wrongdoing.
The Los Angeles-based bank’s shares have lost nearly 73% of their value so far this year. The stock was last trading at $4.85 before the bell.
It has sought to fortify its balance sheet and stem the stock rout through divestitures of non-core units.
(Reporting by Manya Saini in Bengaluru; Editing by Krishna Chandra Eluri)