Short sellers targeting B. Riley in smear campaign, sources say

Speculative traders intent on driving down the price of shares of B. Riley Financial Inc. have attempted to undermine the company's credibility through a smear campaign, industry sources say, that includes spreading lies about individual employees and questioning the firm's financial health.

The campaign by short sellers, or traders looking to profit from the decline in the company's stock price, has been particularly intense over the past few months. In November, it was first reported that the head of the Franchise Group, a company B. Riley had invested $216.5 million in over the summer as part of a management buyout, was linked to a hedge fund manager who pleaded guilty of fraud.

"The shorts were putting rumors out that B. Riley would not get internal audits done or get financial statements out in time," said one senior industry executive who spoke anonymously. Another industry source, also speaking off the record, said the short sellers have also contacted industry recruiters and B. Riley competitors as part of the effort.

B. Riley Financial, a boutique investment bank that has recently been expanding into wealth management and financial advice, has been working its own campaign to bolster investors, which have seen the company's share price fall from $60.72 in July to $16.66 in Thursday afternoon trading.

In December, the company moved up an Investor Day presentation rather than waiting until January to reassure shareholders. And on Thursday, the company released a statement that said outside counsel had cleared the firm and found it was not involved and had no knowledge of any misconduct at the hedge fund, Prophecy Asset Management, which had been linked to Brian Kahn, the CEO of the Franchise Group.

"Over the past year, persons acting to manipulate the price of the company's stock and to profit from that manipulation have sought to overwhelm the company and its partners, advisors, employees and clients with baseless claims of alleged wrongdoing by B. Riley Financial, often accompanied by outrageous personal harassment," according to the company's statement. "Their actions have far exceeded the acceptable limits of financial research and are an attempt to actively damage our business to justify their inaccurate claims. Their behavior is inexcusable, and their claims lack merit."

B. Riley's tone in its public rebuke of short sellers caught another industry executive's ear.

"It's highly unusual to put this type of language in a public company statement," said the executive, who spoke anonymously to InvestmentNews. "Generally, public firms don’t want to go beyond any statement of fact. This almost sounds like the wounded pride or dignity of B. Riley."

A B. Riley spokesperson declined to comment.

Short sellers taking aim at financial services companies is nothing new. Short sellers generated more than $7 billion in profit from the mass sell-off of bank shares by the end of last March, according to a report by CNBC that cited data firm Ortex.