Beth Ewen
FAT Brands CEO Andy Wiederhorn started 2022 by celebrating his company’s nearly $1 billion in acquisitions over 18 months and predicting a focus on “digestion” for the nine new restaurant chains. Those include Johnny Rockets, Twin Peaks, Fazoli’s and others. By February, trouble surfaced.
On February 22, FAT Brands said the U.S. Securities & Exchange Commission and the U.S. Attorney’s Office for California opened investigations in December into the company and its CEO, according to an SEC filing. “At this stage, the company is not able to reasonably estimate the outcome or duration of the government investigation,” the filing said.
The feds are “formally seeking documents and materials concerning, among other things, the company’s December 2020 merger with Fog Cutter Capital Group, transactions between these entities and other benefits or payments received by Mr. Wiederhorn or his family,” the filing said. The company is cooperating with the government, and “we believe the company is not currently a target of the U.S. Attorney’s investigation.”
On February 19, The Los Angeles Times published an article saying Wiederhorn and his son and COO Thayer Wiederhorn are under investigation for “allegations of securities and wire fraud, money laundering and attempted tax evasion.”
No charges have been filed, and no one at FAT Brands had seen the November affidavit upon which the L.A. Times article said the investigation was based, Wiederhorn’s outside attorney said at the time.
“Mr. Wiederhorn categorically denies these allegations and at the appropriate time we will demonstrate that the government has its facts wrong,” said Douglas Fuchs of Gibson, Dunn & Crutcher, in a statement sent to Franchise Times, adding “despite our requests, the government has refused to provide us with a copy of the affidavit.”
On February 11, a Delaware Chancery court kept alive a lawsuit accusing Andy Wiederhorn, FAT’s largest shareholder, and three directors of “looting” the company by shifting around $50 million in debt to “already weak” FAT Brands through “insider deals and a merger,” according to the lawsuit.
The lawsuit, originally filed in July 2021, accused Wiederhorn of “running FAT Brands into the ground and bleeding it of its cash,” the complaint alleges, adding Fog Cutter Capital gave Wiederhorn loans that it couldn’t fund without nearly $40 million from the operating company. Fog Cutter later forgave a $16.8 million personal loan to Wiederhorn, the complaint alleges.
Plaintiffs James Harris and Adam Vignola also name as defendants Squire Junger and James Neuhauser, both directors, and Edward Rensi, the former McDonald’s CEO who has been chairman of FAT’s board since October 2017, at the time of its initial public offering.
“There was never a business justification for these loans,” the lawsuit said. “Wiederhorn used FAT Brands as a discount lender and plaything.”
In his statement, Fuchs said, “These loans were completely legitimate and were independently reviewed and approved. In addition, Mr. Wiederhorn’s tax returns were prepared and approved by independent tax professionals and he has been making payments under a plan approved by the IRS.”
‘It’s very unfair’
“I stand by my statement that I categorically deny these allegations,” Wiederhorn said in an interview in March. “The newspaper articles have the facts wrong. And this shouldn’t be something that’s publicly vetted. There’s been no charges. It shouldn’t have been publicly disclosed, and it’s very unfair.”
Wiederhorn said he is the subject of the SEC inquiry, not the company. This is contrary to FAT Brands’ statement in its SEC filing, which states the company and Wiederhorn family members are targets of the investigation. “The government has told FAT Brands it is not a target. All of our constituents are extremely supportive of the company, or me individually, my family, from bond holders to stockholders to franchisees to friends and family,” he said.
As for the shareholder lawsuit, he dismisses it. “The shareholder that sued us last July, he sued us three times before. This is the kind of activity that costs companies money,” and shareholders, too. “When you have a guy sue you four times in three years, that’s nuts.”
Donald Enright of Levi & Korsinsky, one of the attorneys representing Harris and Vignola, did not reply to requests for comment.
In its annual report filed in late March, FAT Brands reported $118.9 million in revenue for fiscal 2021, compared to $18.1 million the year before. Net loss was $31.6 million for 2021, compared to $14.9 million the prior year. FAT was trading for $7.54 per share, down from $12.40 at its six-month peak in November 2021.
Net cash from financing activities last year was $815.2 million, from a whole business securitization plus three securitization transactions relating to the acquisitions of Global Franchise Group, Twin Peaks, Fazoli’s and Native Grill & Wings, and the issuing of Series B preferred stock. The 10Q notes “significant outstanding indebtedness” under the facilities, “which require that we generate sufficient cash flow to satisfy the payment and other obligations.”
Andy Wiederhorn controls 55.2 percent of the voting power of its common stock, and is able to “control virtually all matters requiring stockholder approval, including election of directors and significant corporate transactions,” the filing said.
Unusual for a publicly held company, three of Wiederhorn’s sons hold executive positions at FAT Brands, with COO Thayer, CDO Taylor and Creative Director Mason Wiederhorn receiving compensation of $1.08 million, $960,000 and $740,000, respectively.
Wiederhorn said his focus is on the business: “The franchisees and the brand presidents have been very supportive, and understand it’s business as usual.”
Beth Ewen is senior editor of Franchise Times, and writes the Continental Franchise Review® column in each issue. Send interesting legal and public policy cases to [email protected].