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FAT Brands Is Criminally And Civilly Charged

FAT Brands

It is rare for a publicly traded company to force the Securities and Exchange Commission to prove a civil case in court. The vast majority of issuers opt to resolve a matter through – in recent years – nearly always an administrative order.

It is extremely rare for a publicly traded company to force the Department of Justice to prove a criminal case in court. The vast majority of issuers opt to resolve a matter through – in recent years – an alterative resolution vehicle such as a non-prosecution agreement, deferred prosecution, etc.

FAT Brands (a global franchising company which currently owns 18 restaurant brands including Johnny Rockets, Fazoli’s, Ponderosa, and Bonanza Steakhouses) appears to be that rare company as the company (and various current or former executives) were recently civilly charged by the SEC and criminally charged by the DOJ. (See here and here).

The SEC charges include alleged violations of the FCPA’s books and records and internal controls provisions in yet another so-called non-FCPA, FCPA enforcement action.

SEC Matter

In summary fashion, this complaint alleges:

“Between October 2017 and March 2021 (the “Relevant Period”), Andrew Wiederhorn (“Wiederhorn”), the former chief executive officer and current director and controlling shareholder of FAT Brands Inc. (“FAT” or the “Company”) used almost $27 million of FAT’s cash on his personal expenses including private jets, first class airfare, luxury vacations, his rent and mortgage payments, shopping, and jewelry. During this time, Wiederhorn falsely told the Company’s auditors, board of directors, and investors that neither he nor his family members had any direct or indirect material interest in the FAT cash that Wiederhorn used for those personal expenditures.

Between July 2018 and March 2021, Wiederhorn engaged in deceptive acts and made false and misleading statements to make it appear that the millions of dollars of FAT’s money he was spending on himself and on his family each year were company loans to FAT’s affiliate Fog Cutter Capital Group, Inc. (“FCCG”), another company that Wiederhorn controlled, for FCCG’s business expenses. Wiederhorn used his control over FCCG to take the money that FCCG was receiving from FAT and spend it on himself. Wiederhorn then misled FAT’s board of directors (the “FAT Board”) and the Company’s auditors, leading them to believe that FCCG was using the proceeds from FAT’s loans solely for FCCG’s business expenses and pre-existing liabilities.

Although this fraudulent scheme allowed Wiederhorn to hide from the FAT Board, the Company’s auditors, and investors the fact that he was spending FAT’s cash to fund his lavish lifestyle, it stripped FAT of approximately 40 percent of its revenue during the Relevant Period, often leaving the Company with insufficient cash to pay its own bills. Between 2017 and 2019, Wiederhorn instructed his son to wire over $9 million into FAT, concealing that Wiederhorn used millions of FAT’s funds for his own personal spending and that FAT was otherwise unable to pay its own bills.

Wiederhorn enlisted the help of Ron Roe (“Roe”), the Company’s former chief financial officer (“CFO”) and current senior vice president (“SVP”) of finance and executive officer to execute his scheme. Roe used his position at the Company to send FAT funds to Wiederhorn, Wiederhorn’s family, or Wiederhorn’s creditors. Both Roe and Rebecca Hershinger (“Hershinger”), another former CFO at FAT, personally signed, certified, and disseminated false and misleading statements that failed to properly disclose Wiederhorn’s personal interest in these transactions.”

Based on the above, FAT is charged with violating, among other things, the FCPA’s books and records and internal controls provisions; and Wiederhorn, Roe, and Hershinger are charged with, among other things, aiding and abetting FAT’s violations of the books and records and internal controls provisions.

Under the heading, “FAT’s Books and Records Were Inaccurate and the Company Failed to Maintain a Sufficient Internal Accounting Controls,” the complaint alleges:

“FAT failed to make and keep books and records that accurately reflected the reportable related person transactions. Specifically, FAT failed to track and report its own CEO’s direct or indirect material interest in the Company was sending to FCCG, an affiliate company.

Wiederhorn made false and misleading statements in his director and officer questionnaires about reportable related person transactions that would have allowed FAT to accurately track and report those transactions.

In addition, despite FAT’s auditor notifying the FAT Board of an internal control deficiency relating to Wiederhorn having complete control over FAT’s accounts in early 2020, FAT did not devise or maintain an internal accounting control system that provided reasonable assurance that access to assets was consistent with addressing this deficiency. Despite the FAT Board devising a control on April 14, 2020 which required FAT Board advance approval for any additional lending to FCCG be approved in advance by the FAT Board, Wiederhorn authorized loan amounts from FAT to FCCG beyond the limits approved by the FAT Board. As a result, during the second quarter, the third quarter, and the fourth quarter of 2020, Wiederhorn lent FAT money to FCCG far in excess of the FAT Board-approved amounts.

Wiederhorn, as FAT’s CEO, knew or was reckless in not knowing that FAT failed to track, report, and disclose reportable related person transactions, that he could transfer money from FAT at his own discretion, and that he made false statements to the FAT Board at April 2020 meetings regarding the purpose of the FAT loans to FCCG. Wiederhorn was also aware that the FAT Board included a control on April 14, 2020 requiring that any additional lending to FCCG be approved in advance by the FAT Board, and that he authorized loan amounts from FAT to FCCG beyond the limits approved by the FAT Board. In addition, Wiederhorn signed director and officer questionnaires that made false and misleading statements about reportable related person transactions that would have allowed FAT to accurately track and report these transactions.

Roe, as FAT’s CFO and SVP of finance, knew or was reckless in not knowing that FAT failed to track, report, and disclose reportable related person transactions, that Wiederhorn could transfer money from FAT at his own discretion, and that Wiederhorn made false statements to the FAT Board at April 2020 meetings regarding the purpose of the FAT loans to FCCG. Roe was a signatory of the Intercompany Agreement and attended the April 14, 2020 meeting wherein the FAT Board added an internal control requiring that any additional lending to FCCG be approved in advance by the FAT Board. However, Roe did not take any steps take any steps to implement an internal accounting control system that prevented Wiederhorn from circumventing or violating the FAT Board’s internal control, despite being aware that Wiederhorn authorized loan amounts from FAT to FCCG beyond the limits approved by the FAT Board.

Hershinger, as FAT’s CFO, knew or was reckless in not knowing that FAT failed to track, report, and disclose reportable related person transactions, that Wiederhorn could transfer money from FAT at his own discretion, and that Wiederhorn made false statements to the FAT Board at April 2020 meetings regarding the purpose of the FAT loans to FCCG. Hershinger attended the April 14, 2020 meeting wherein the FAT Board added an internal control requiring that any additional lending to FCCG be approved in advance by the FAT Board. However, Hershinger did not take any steps to implement an internal accounting control system that prevented Wiederhorn from circumventing or violating the FAT Board’s internal control, despite being aware that Wiederhorn authorized loan amounts from FAT to FCCG beyond the limits approved by the FAT Board.

Hershinger was also aware that Wiederhorn signed director and officer questionnaires that made false and misleading statements about reportable related person transactions that would have allowed FAT to accurately track and report these transactions.”

According to the complaint:

“FAT, Wiederhorn, and Roe executed tolling agreements suspending the period for one year and sixty days. Hershinger executed tolling agreements in 2023 and 2024 suspending the period for five months and sixty days.”

DOJ Matter

As stated in this DOJ release:

“Andrew A. Wiederhorn, the former CEO and current controlling shareholder of the publicly traded Fat Brands Inc. (FAT), has been indicted on federal charges alleging a scheme to conceal $47 million in distributions he received in the form of shareholder loans from the IRS, FAT’s minority shareholders, and the broader investing public …

According to the indictment …, Wiederhorn – assisted by FAT’s chief financial officer and his outside accountant at advisory firm Andersen – 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 violate 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 release identifies the following defendants charged in the indictment:

  • Wiederhorn
  • William Amon, 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 Hershinger who formerly served as FAT’s CFO and, in that role, certified FAT’s public filings; and
  • Fat Brands Inc.

The release states:

“Wiederhorn is charged with one count of endeavoring to obstruct the administration of the Internal Revenue Code, six counts of tax evasion, and one count of false statements and omission of material facts in statements to accountants in connection with audits and reviews.

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.”

In this release, FAT Brands states:

“FAT Brands was informed that it has been indicted on two violations of SOX 402 for arranging approximately $2.65 million in loans to Andy Wiederhorn. These charges are unprecedented, unwarranted, unsubstantiated, and unjust. They are based on conduct that ended over three years ago and ignore the Company’s cooperation with the investigation. FAT Brands will take all necessary action to defend itself, while seeking a just resolution to these charges.”

In this SEC filing, referring to both the DOJ and SEC matters, FAT Brands states: “The Company is evaluating these charges and intends to vigorously defend itself against them.”

Last Friday, when the DOJ and SEC matters were announced, FAT Brands stock closed down 27%. (See here for more).

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