(Bloomberg) -- B. Riley Financial Inc. sent its stock soaring by finally delivering its overdue annual report, which provided fuel both for fans of the boutique investment bank and skeptics who contend its accounting is deeply flawed.

Auditors for Los Angeles-based B. Riley cited various material weaknesses in the company’s internal controls, and some of the previously reported data was revised, according to regulatory filings.

Separately, B. Riley said a new probe it commissioned by a second law firm found the company had no involvement in the legal woes of Brian Kahn, a former client who drew scrutiny from US authorities for his role in the 2020 collapse of a hedge fund.

The Wednesday filing eases some pressure on B. Riley, whose stock lost about two-thirds of its value after short sellers aired concerns about its relationship with Kahn. At the same time, the report provided fodder for investors who’ve criticized the firm’s ability to track its own finances and the failure to disclose key details of its transactions. 

The jitters were amplified when B. Riley missed the deadline to file its audited results in March, and it needed an extension from its lenders to finish the job. When the report finally emerged, B. Riley’s auditors criticized the bank’s controls over its financial reporting, and B. Riley said it might need the rest of the year to fix them.

“We acknowledge the complexities of our business are a result of an aggressive acquisition and investment strategy that has meaningfully diversified our platform,” Chief Executive Officer Bryant Riley said in a statement. “We are continuing to strengthen our processes and procedures to ensure we are best positioned to capitalize on the substantial market opportunities in front of us.”

The stock surged 25% to $27.24 at 11:41 a.m. in New York and traded as high as $35.

Among the problems cited by auditors at Marcum LLP was B. Riley’s ability to gauge investment valuations, one of the key criticisms lodged by short sellers who’ve been betting against the stock. Marcum said management’s review procedures lacked “a level of precision sufficient to prevent or detect a potential material misstatement in the consolidated statements.”

Related Parties

Marcum also called out efforts “to properly identify and disclose material related party transactions,” a category that can include deals with people who have close ties to the company or its personnel and might pose conflicts of interest. This, too, has drawn scrutiny from short sellers who said such ties can result in sweetheart deals that hurt shareholders.

Elsewhere in the annual report, B. Riley detailed its dealings with Brian Kahn and acknowledged the risk that fallout from their prior relationship may continue to hurt B. Riley’s business, results of operations and its stock price. The firm said it redid an internal investigation with the help of a new law firm, Winston & Strawn, which reaffirmed that the bank has no ties to any alleged misconduct of Kahn in the collapse of Prophecy Asset Management. Still, B. Riley said the matter may trigger further “adverse effects on our business.”

Read More: SEC Probes B. Riley Deals With Client Tied to Failed Fund

A previous internal probe that reached the same conclusion had been done by Sullivan & Cromwell. Short sellers had called for a new one because that law firm’s prior work for B. Riley presented a potential conflict of interest.

Kahn has categorically denied any wrongdoing and said he was among those who lost money when Prophecy collapsed. He hasn’t been charged with anything by US authorities. 

The new report and statements didn’t satisfy some of those who’ve been betting against the stock. 

“Marcum decided to enclose new risk factors and call Kahn a related party, which is everything the skeptics have been saying,” short seller Marc Cohodes said by email. The firm still has “mismarked assets and related-party dealings that don’t pass the sniff test.” 

Paper Losses

Wednesday’s rally dealt roughly $100 million of paper losses to short sellers when the stock was up by $10, according to S3 Partners director Matthew Unterman. Bearish bettors were already in the red for 2024, largely because of the high costs to borrow shares for shorting. Short interest amounted to more than 60% of the stock’s float, according to S3 data.

Read More: Franchise Group Inc. Lenders Tap Gibson Dunn Amid Kahn Dealings  

Before Wednesday’s filing, shares of B. Riley had plunged amid concern about its deals with Kahn, who has been blamed in court papers by some investors for Prophecy’s collapse. The fund’s demise has been the subject of a federal investigation, and a key executive there pleaded guilty to fraud charges in November. Kahn has been tagged by authorities as an unindicted co-conspirator, Bloomberg reported.

While Kahn was managing money for Prophecy, he acquired a controlling stake in Franchise Group, a collection of retail chains that he later took private with help from B. Riley. Short sellers contend that the Prophecy fraud case casts doubt on the validity of his ownership in Franchise Group and could impair B. Riley’s holdings in that firm.  

--With assistance from Donal Griffin and Bre Bradham.

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