The Franchise Group is a conglomerate that owns a number of franchise retail Brands These include the wellness retailer, Vitamin Shop, the pet retailer Pet Supplies Plus the furniture retailer American Freight the rent to own retailer Buddy's Home furnishing the for-profit education company Silven Learning, and the Pet bathing company Wagon Wash The Franchise Group was created by Brian Con who previously owned a Rent to Own Furniture retail called Buddies Home Furnishing He took the company public in 2019 in a rather unconventional way. He merged Buddies with a tax preparation company called Liberty Tax which was already being publicly traded. Brian KH became the CEO of the combined entity, which changed his name to the Franchise Group. Over the next few years, the Franchise Group did a number of leveraged buyouts of other franchise retail businesses, building it into the conglomerate it is today in 2021.

Just 2 years after the merger, the franchise Group sold the Liberty Tax business to his SPAC This raises the question: why did they merge with Liberty Tax If they were just going to get rid of it 2 years later, in May of 2023, less than 4 years after going public, CEO Brian Khan led a Consortium of investors which took the company private again for $2.6 billion. This also seems kind of strange. why take the company public if you're just going to take it private again 4 years later, Separately, in early 2020, a New York-based hedge fund called Prophecy Asset Management unexpectedly halted all client withdrawals and shut down in November of 2020. 3 John Hughes the co-founder and Chief Operating Officer of Prophecy pled guilty to conspiracy to commit Securities fraud.

Ultimately, investors in the hedge fund lost $300 million. So what does this bankrupt hedge fund have to do with the franchise group and its brief stint as a publicly traded company? Join us as we delve into what may be one of the most strange and complicated cases of white CER crime we've ever covered on this channel. In the 2010s, a hedge fund called Prophecy Asset Management was gaining attention amongst investors for its Stellar track record in unique structure. Prophecy was co-founded by Jeffree Spots who held the position of CEO and John Hughes who held the position of Chief Operating Officer in Chief compliance officer.

Investing money into a hedge fund is risky because the value of the fund's Investments can go either up or down. If the hedge fund makes money, the managers take a percentage of the profits, but if the hedge fund loses money, its investors are left holding the bag. But this is just the nature of investing. If you want to generate High returns, you also need to accept the risk of losses.

However, Prophecy claims to have a unique and innovative structure which allowed it to deliver High returns with low risk. Instead of managing money themselves, they would instead allocate money to a diverse array of independent Traders called sub-advisors Each sub-advisor would receive money from Prophecy and invest it in liquid assets such as stocks and bonds. If the sub-advisor makes money, they would receive a percentage of the gains as a performance fee. If the sub-advisor loses money, they're required to compensate Prophecy for the losses.

Each sub-advisor was required to put up collateral equal to 10% of the value of the money they received from Prophecy. If they they lose money, they required to add additional collateral. Otherwise, Prophecy will liquidate their position because the sub-advisors cover the losses. Prophecy claimed this investment strategy had very little risk.

In fact, since Inception they had never experienced a down month. These lowrisk returns were very attractive to investors, and Prophecy was able to raise hundreds of millions of dollars. While this sounds like a great strategy, in theory, there's a major red flag. Prophecy is essentially giving margin loans to the sub-advisors But unlike a traditional margin loan, if the sub advisor makes money, Prophecy takes some, if not most of the upside.

This seems like a really bad deal for the sub advisors. They're on the hook for all their losses, but have to give up a substantial part of their gains if the strategy was really so safe. As Prophecy claimed, these sub-advisors should have been able to receive traditional margin loans at much better terms. Basically, it makes no sense why any sub-adviser would agree to this arrangement with Prophecy.

As you might have guessed, the whole thing was basically a giant sham. Very few if any legitimate investors agreed to become Prophecy sub advisers. The only people willing to agree to Prophecy's terms were themselves frauders. For example, in 2014, Prophecy signed on a South Carolina based company called Casset Short-term Trading to be one of their sub-advisors Casset claimed to have developed a foolproof options trading strategy that couldn't lose money.

As it turns out, there was no options trading strategy and the whole thing was a Ponzi scheme. As Prophecy lost huge amounts of money from its sub-advisors it became somewhat of a Ponzi scheme itself. They used various accounting gimmicks to cover up their losses and their investors. They were consistently profitable.

In 2020, Prophecy finally imploded when it finally burned through all of its investors money in 2023. Co-founder and Chief Operating Officer John Hughes pled guilty to conspiracy to commit Securities fraud. For someone to be guilty of a conspiracy, there has to be more than one person involved. We'll get to who these co-conspirators were shortly.

So how does this all come? back to the Franchise Group in Brian KH What would eventually become the Franchise Group was originally created in Florida by a businessman named Brian Brian KH who founded a private Equity Firm called Vintage Capital Management. In 2012, Vintage acquired a Rent to Own Furniture retailer called Buddy's Home Furnishings. The charging document against John Hughes references two unnamed co-conspirators co-conspirator one was a CEO of Prophecy Asset Management Jeffrey Spot Co-conspirator 2 was one of Prophecy's sub-advisors Since in or around 2019, co-conspirator 2 was also the CEO and president of a multi-billion dollar company that owned and managed large and diversified retail franchises. This description seems to match the franchise group exactly.

Brian KH became the CEO of the franchise group immediately upon its Creation in 2019. In a separate complaint filed by the SEC Co-conspirator 2 was described as a Florida resident who controlled a company called Vintage Capital Management Brian Con is a Florida resident and he indeed managed a company called Vintage Capital Management the private Equity Firm that owned Buddy's Home Furnishings before it merged with Liberty Tax While we don't have official confirmation, it's hard to imagine that Co Conspirator 2 could be anyone else. At some point before 2018, Brian Khan became a sub-advisor for Prophecy. In fact, he became their biggest sub-advisor by far.

Ultimately receiving 86% of Prophecy's assets from at least 2018 through 2020. He incurred massive and escalating trading losses, in some cases losing tens of millions of dollars in a single quarter. So what was Brian Khan investing in that was causing him to lose so much money? According to the SEC, one of these Investments was a $36 million loan to Vintage Capital Management the company that owned Body's Home Furnishing Vintage used the $36 million to bail out one of his portfolio companies that was facing distress. It's unclear whether or not this portfolio company was buddies.

Vintage ultimately defaulted on the loan and Prophecy used various accounting gimmicks to cover up the loss. It appears that Brian Conan was using Prophecy's investor money to bail out his failing retail business. This was disastrous for Prophecy. Instead of liquidating Khan's positions, Prophecy helped to cover up the losses they loan tens of millions of dollars to Shell Companies controlled by Con Con then used this money to post as collateral.

so it was effectively Prophecy using its client's money as collateral for its own loan. But this was not a sustainable solution as Brian's losses continued to explode. Prophecies soon wouldn't have enough cash to keep doing these round tripping transactions in the summer of 2019. Brian Decided that he wanted to take Buddy's Home Furnishings public, but instead of doing an IPO, he decided to merge with Liberty Tax which was already a publicly traded company.

There are no obvious synergies between a Rent to Own Furniture retailer and a tax per operation services company. In hindsight, the merger looks like little more than a clever way to take Buddy public. Shortly after the merger, the company changed its name to the Franchise Group and Brian KH was named CEO and being the CEO of a publicly traded company, seemed to help him with his collateral. Problem By this point, KH was massively underwater on his collateral requirements to Prophecy and their ability to funnel him more cash was running out, so they instead allowed KH to post non-cash assets as collateral according to the Doj.

KH told Prophecy that he had received $125 million of preferred stock from the Franchise group. He used a certificate of this preferred stock as collateral. As it turns out, these certificates were forged, the Franchise group did not issue. Con: $125 million of preferred stock.

Given that the franchise group was a publicly traded company, it was easy to look at their financial statements and see that no such preferred stock had been issued. But according to the Doj prophecy, Senior Management did zero due diligence to see whether or not the preferred stock certificates were real. Throughout this period, K continued to operate as a sub-advisor for prophecy. At this point, it's not clear what he was investing the money in, perhaps he was just trading stocks, but whatever he was doing, he wasn't very good at it.

By March of 2020, his cumulative losses had grown to $400 million, which was greater than the reported AUM of Prophecy asset management. At this point, the hedge fund ran out of cash and went bust, leaving their investors to hold the bag for hundreds of millions of dollars of losses. For the next few years, the Franchise Group did Leverage buyouts of a number of retail companies ianes including Vitamin Shop Wagon Wash and Pet Supplies Plus In 2023 Brian Con: lined up financing to take the company private Again, why would he take the company public just to take it private 4 years later. While this is speculation, the only reason I can think of is that he wanted to be in control of a public company to issue himself the fake preferred stock as collateral.

The fact that the franchise group was a publicly traded company may have made the preferred stock certificates appear more credible to Prophecy's auditor. As of today, Prophecy's Chief Operating Officer John Hughes has pleaded guilty to conspiracy to commit Securities Fraud Prophecy CEO Jeffrey Spot and Brian KH have not yet been charged with any crime. It could be the case that prosecutors view John Hughes as a smallest fish. They may have offered him a lenient sentence if he pleads guilty and agrees to testify against his two co-conspirators but this is purely speculation.

Another question is, why did Prophecy help Brian cover up his losses? Did they really believe his preferred stock certificates were legit? Or were they so far deep into the fraud that they had no choice but to keep up the faade. At this point, it's very difficult to say. All right guys, that wraps it up for this video. This is an ongoing case, so make sure you subscribe to the channel as we'll let you know if there are any future updates.

As always, thank you so much for watching and we'll see you in the next one! Wall Street Millennial Signing out.