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Nothing changes.. another public company devalued because the owner/boss has sticky fingers.

Nigel Morris-Cotterill

Fat Brands sees millions wipe off market value as Wiederhorn is charged.

They say "FAT Brands is a leading global franchising company that strategically acquires, markets and develops fast-casual, quick-service, casual dining, and polished casual dining concepts around the world. " The USA's Department of Justice says that that Andrew Wiederhorn, the former CEO and current controlling shareholder of the listed group had sticky fingers and not in a good way. The story has elements we should all be familiar with.

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*At present, there are charges and no convictions and so facts in issue are allegations, not evidence of guilt. *

Andrew Wiederhorn is the "controlling shareholder" of FAT Brands, a company that franchises operations in burgers, ribs and other basically finger food. Its most famous brand is Johnny Rockets but there are quite a few more. The first question to be asked is simply this: how does a listed company have "a controlling shareholder" and why do shareholders accept such a concentration of power.

It is long established that such concentration of power leads to questionable (to be polite) decision-making. There's HIH, Enron, Satyam, Maxwell group and those are just samples from a very large selection.

It is alleged that Wiederhorn, the former Chief Financial Officer and a tax adviser have all been charged with involvement in an alleged scheme to defraud shareholders of approx USD47 million. Wiederhorn has also been indicted on weapons charges.

A US Federal Grand Jury has handed down an indictment alleging a scheme to receive USD47 million in distributions the form of shareholder loans and to conceal it from the IRS, FAT’s minority shareholders and the broader investing public.

It was not a clever or complex fraud, according to the indictment: the defendants concealed millions of dollars in reportable compensation and taxable income and evaded the payment of millions of dollars in taxes, while causing FAT itself to breach the Sarbanes-Oxley Act’s prohibition on direct and indirect extensions of credit to public-company CEOs in the form of a personal loan.

The defendants charged are:
* Wiederhorn, of Beverly Hills;

* William J. Amon, of Los Angeles, a certified public accountant, attorney, and one-time managing director of Andersen’s Los Angeles Office, who provided tax-advisory services to Wiederhorn, FAT, and FAT’s former affiliate, Fog Cutter Capital Corporation (FOG);

* Rebecca D. Hershinger, a Los Angeles-area resident who formerly served as FAT’s CFO and, in that role, certified FAT’s public filings; and

* Fat Brands Inc., a publicly traded global franchising company based in Beverly Hills that acquired and developed casual-dining restaurant concepts, including Fatburger, Johnny Rockets, Hurricane Grill and Wings, Yalla Mediterranean and Ponderosa and Bonanza Steakhouses.

Hang on, you say. "Andersen"? Well, yes. After the Enron scandal, Arthur Andersen was dissolved. The consulting arm became Accenture. Accounting and Audit no longer existed as a singular entity. But the name didn't quite disappear and a micro-firm called Andersen was formed in 2002 around the time that Arthur Andersen LLP was indicted for obstructing justice.

The new firm stayed quite low profile for ten years and then announced that it was going global and in its press release (if I recall it correctly) it said that a handful of carefully screened former employees of Arthur Andersen were part of the plan.

When the charges were announced, FAT Brands shares suffered a significant drop: according to Yahoo, the shares lost more than 28% in one day. That sounds terrifying but actually, while the shares are not penny shares, they aren't worth a lot: USD5.42 at close of business on Friday. In three hours post market trading, they came up to USD5.97.

The allegations are fascinating:

According to the indictment, Wiederhorn began disguising distributions to himself in the form of shareholder loans approximately 30 years ago, when he served as CEO of another company, Wilshire Credit Corporation (WCC). After forgiving himself some $65 million in putative debts owed to WCC, Wiederhorn resolved a federal grand jury investigation into that and related conduct by pleading guilty in 2004 in the District of Oregon to the payment of illegal gratuities and filing a false federal tax return. FOG and its affiliates are successor corporate entities to WCC and its affiliates.

From at least 2006 through 2021, Wiederhorn was the subject of efforts by the IRS to collect personal income tax and trust fund taxes he owed personally and as a responsible party and guarantor for entities, including FOG, the indictment states. The IRS efforts included levies and liens on Wiederhorn’s accounts and assets due to outstanding taxes he owed. The IRS, beginning in 2016, assessed Wiederhorn penalties for FOG’s failure to pay trust fund taxes and failure to establish a payment plan. By March 2021, Wiederhorn’s unpaid personal income tax liability to the IRS totaled approximately $7,743,952, inclusive of statutory interest and penalties, according to the indictment.

Beginning no later than 2010 and continuing through early 2021, Wiederhorn allegedly caused employees of FAT and FOG to compensate him by distributing to him approximately $47 million for his personal use and benefit. Wiederhorn, Amon, Hershinger and others miscategorized these distributions as “shareholder loans” and failed to disclose as reportable compensation to the IRS, SEC and the broader investing public, the indictment alleges.

Neither FAT nor FOG required Wiederhorn to post collateral, make interest payments or observe any of the other commercial requirements and realities of true loans, according to the indictment, which adds that Wiederhorn generally determined for himself the amount, timing and form of both extension and forgiveness of these “loans” without informing the directors of either FAT or FOG.

“The indictment alleges that with the assistance of his co-defendants, Mr. Wiederhorn repeatedly evaded his taxes and the law as he engaged in a cover-up to avoid being accountable to shareholders,” said Krysti Hawkins, the Acting Assistant Director in Charge of the FBI's Los Angeles Field Office.

“After defendant FAT became an issuer of securities through its IPO [initial public offering], defendant Wiederhorn caused millions of dollars from FAT’s accounts to be disbursed to Wiederhorn and his family members for their personal benefit,” according to the indictment. “These disbursements were used to fund the purchase of private-jet travel, vacations, a Rolls Royce Phantom, other luxury automobiles, jewellery and a piano.”

Is this story becoming familiar, yet? It should. We've seen it before, dozens of times.

Someone with the clout to make decisions gets a close coterie of associates to give effect to a scheme and to cover it up. The USD47 million represents both a loss to the exchequer but also to shareholders over a long period of time.

Stand by for a class action based no on Friday's fall in share price (that will probably happen) but from former shareholders who received less dividends than they should have. But they might like to wait - the Department of Justice is calling for victims to make themselves known and so it is possible that when the company enters into a plea agreement (as it surely will) compensation will be included. That, ironically, means that shareholders at that time will bear that cost.

Both Wiederhorn and Hershinger are charged with four counts of wire fraud, two counts of false statements and omission of material facts in statements to accountants in connection with audits and reviews and one count of certifying faulty financial reports.

Wiederhorn, Hershinger and FAT are charged with two counts of extension and maintenance of credit in the form of personal loan from issuer to executive officer.

Hershinger is also charged with one count of making false statements to federal investigators, including, among things, denying that company funds were being used to pay Wiederhorn’s personal American Express bill.

Amon is charged with four counts of aiding and assisting the filing of false tax returns.

Separately, the U.S. Securities and Exchange Commission has also filed a civil enforcement action against Wiederhorn, Hershinger, FAT, and another FAT executive.

The firearms charge arises because Wiederhorn is already a convicted felon and was not permitted to be in possession of a gun or of ammunition.

The story is not, of itself news. The investigation has been public knowledge since 2022 when Wiederhorn’s attorney, Douglas Fuchs of Gibson, Dunn & Crutcher, told The Los Angeles Times in a statement that his client had done nothing wrong. “Mr. Wiederhorn categorically denies these allegations, and at the appropriate time, we will demonstrate that the government has its facts wrong,” Fuchs said.

The previous conviction arose out of a company called Wilshire Financial Services Group in Portland, Oregon. Also publicly traded, Wilshire traded in "distressed debt" - i.e. buying and selling bad debt. It was claimed that his personal shareholding in that business reached a value of USD140 million.

In Portland, Jeff Grayson ran an investment company called Capital Consultants which claimed to have USD1,000 million under investment. A lot of it was money from Union pension funds. Grayson lived a life of luxury including travelling around in a Bentley. Rumours started to swirl: the "investments" were odd-ball including a fleet of aeroplanes that couldn't fly.

But somehow Grayson was able to keep getting more and more money while being the benefactor of a school, raising all sorts of funds for good causes and being photographed with those said to be the great and the good. Like the officesof The Bank of Credit and Commerce International all had a photo of the founder shaking hands with the Peanut President Carter, Grayson's office photos were of well known people, media reports say.

"In 1998, WW published the first story linking Grayson to a youthful financier named Andy Wiederhorn, who specialized in buying bad debts and squeezing money out of them. With his slicked-back hair, cufflinks and private jet, Wiederhorn looked like he'd gotten lost in Portland on his way to Wall Street. His stake in just one of his companies, Wilshire Financial Services Group, was worth more than USD140 million by the time Wiederhorn turned 32." - Source: the Willamette Week.

The trouble with dealing in bad debt is that it is, well, bad. Grayson reportedly loaned Wiederhorn (through their companies) USD160 million. That was the entire investment of the Plumbers and Steamfitters' Union and it was was 16% of the supposed investment capital. Wiederhorn's business failed. In 2000, Grayson was accused of running a Ponzi scheme. The story federal investigators unravelled included widespread bribery, exotic hunting trips to Africa and Asia used to influence pension-fund trustees and increasingly desperate bailout schemes featuring shady car dealers and the Miami mob, said WW in 2014.

They were both convicted, with others, for a variety of offences including bribery. Grayson had a stroke and died in an assisted living home.

After 16 months (figures vary from 14 to 16 months) in jail, Wiederhorn was back and he bought a small chain of shops called FatBurger. Over a decade or so, he leveraged that into a national then international franchising business.

And, if prosecutors are correct, he started his dodgy schemes all over again.


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