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, Andy Wiederhorn, according to an SEC filing today. "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," the filing said.
FAT Brands owns Fatburger, Johnny Rockets, Twin Peaks and Fazoli's, among others, including nine restaurant chains acquired in five transactions for nearly $1 billion in the last 18 months. In December 2020, FAT Brands completed a corporate restructuring that Wiederhorn told Franchise Times would remove restrictions and allow more options to purchase franchises in 2021.
FAT Brands merged with its largest shareholder, Fog Cutter Capital, the entity that owned 80 percent of shares and is controlled by the Wiederhorn family. In order to preserve more than $100 million of net operating loss carry-forwards for tax purposes, Fog Cutter could not fall below 80 percent share ownership; with the merger that limitation was dissolved, he said.
On February 11, a Delaware Chancery court allowed a lawsuit to go forward accusing Wiederhorn, FAT's largest shareholder, and three directors of "looting" the company in connection with that merger.
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.
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."
FAT stock down 24 percent by noon
FAT Brands stock declined more than 24 percent since markets opened today, after being closed yesterday for the Presidents' Day holiday, to $7.99 per share late morning. The stock price was $10.56 February 18, the day before a Los Angeles Times article reported Wiederhorn and his son Thayer Wiederhorn, also FAT Brands' chief operating officer, were under investigation by federal agents "for allegations of securities and wire fraud, money laundering and attempted tax evasion."
FAT's outside attorney Douglas Fuchs, of Gibson, Dunn & Crutcher, yesterday sent a statement to Franchise Times that said in part, "Mr. Wiederhorn categorically denies these allegations and at the appropriate time we will demonstrate that the government has its facts wrong."
In his statement, Fuchs said, "These loans were completely legitimate and were independently reviewed and approved." Read Andy Wiederhorn's comments about digesting FAT Brands acquisitions here.
In December 2020, Wiederhorn touted the benefits of the merger with Fog Cutter Capital. "By effecting the merger, FAT Brands will become the parent and Fog Cutter will be the subsidiary. That 80 percent limitation goes away, and now FAT Brands can buy new targets with stock. We can raise as much cash as we can with stock, not just with debt," Wiederhorn told Franchise Times at the time.
"It makes our public float significantly bigger, which is good to get our stock price up. It gives us the ability to buy companies with stock. It takes off all the handcuffs we had in place at the time of our IPO," he added, in 2017. FAT stock hit just under $7.89 on December 11, 2021, up from $3.13 last July.