What's going with RILY? Pt. 3
Part 3
Parts 1 + 2:
RILY finally filed a 10-K on April 25th after being a month and a half delinquent on their SEC requirement. This week, the company filed their 10-Q (late, again) but with none of the symptoms of a fraud that short-sellers have alluded to:
Marcum is still their auditor and signed off on the K
Nomura has not accelerated their NAV loan associated chiefly with the FRG stake and has been constructive after the term loan paydown in Q1.
Clients continue to do business with the Riley investment bank (BRS had a record Q1)
No going concern warnings issued for either FRG or RILY itself
The narrative I have seen flows as follows: an ambitious merchant bank saw an SOTP play (FRG) and overlevered its balance sheet to stretch and buy out the whole enchilada. The whole enchilada included running an MBO with a CEO implicated (but not charged, yet) in a fraud at a hedge fund outside the scope of the operating business, that should have turned up in the bank’s DD of FRG. The balance sheet is further complicated by the nature of the buyout ($200M of loans receivable in the principal book are collateralized by CEO’s shares in FRG, synthetically giving more exposure to the FRG businesses than initially indicated. The past 2-3 quarters have been spent clearing up the nonsense around this and doing DD in the rearview mirror. Currently, exposure to FRG, including the margin loan to FRG CEO, is $444M of the $1.6B of investment assets in the portfolio ($200M+$244M of equity in Freedom VCM):