On Tuesday, Fatburger owner Fat Brands acknowledged that its CEO, Andy Wiederhorn, is under federal investigation related to some of his spending as well as a 2020 merger between the company and his investment firm, Fog Cutter Capital.
In the process, it raised questions again about Wiederhorn’s controversial past and cast a shadow over his company’s unprecedented buying binge over the past 18 months.
The news also served as a reminder of the risky, complex and often free-spending way in which Wiederhorn does business. One of the industry’s most visible chief executives, Wiederhorn has otherwise operated on the edge, using creative financing to keep his company operating and make deals. Along the way, he has faced a number of shareholder lawsuits accusing him of self-dealing and questioning many of these moves. He also landed in prison once.
Wiederhorn, for what it’s worth, denies the allegations that the federal government is investigating. “Mr. Wiederhorn categorically denies these allegations and at the appropriate time we will demonstrate that the government has its facts wrong,” Douglas Fuchs, of the law firm Gibson, Dunn & Crutcher, said in a statement.
Wiederhorn was a controversial figure before he ever owned a restaurant. He ran a company called Wilshire Credit Corp. in the 1990s, a financial company that would make some bad bets on subprime mortgages. It defaulted on $160 million in loans from a company called Capital Consultants.
That firm apparently used funds from its pension clients to repay the loan, which then led to massive federal charges. Investigators then turned its eye on Wiederhorn, and in 2004 he pleaded guilty to a pair of charges, agreed to a $2 million fine and then spent 16 months in prison.
That wasn’t as much of a problem to Wiederhorn’s as this was: Fog Cutter Capital, which was publicly traded then, paid Wiederhorn $4.6 million while he was in prison. At the time, the company had $11.9 million in cash, according to federal securities filings. The company’s auditor resigned, and Nasdaq delisted Fog Cutter for breaking federal rules.
After Wiederhorn left prison, Fog Cutter began focusing on Fatburger, which the firm controlled following an $8 million buyout in 2003. The brand filed for bankruptcy in 2009 but emerged from the restructuring two years later. Wiederhorn moved from Portland, Ore., to Beverly Hills to be closer to the company.
Fatburger was a California chain popular with locals but which struggled outside its home market. The brand has less than 100 domestic locations to go along with a similar number of international units. Wiederhorn has become a frequent spokesman on the state of the restaurant industry and on his chain in general. He is one of the most accessible chief executives in the industry to this day and in 2013 appeared on the CBS reality program Undercover Boss.
The company would become the foundation for Wiederhorn’s return to the public markets. Wiederhorn created Fat Brands and in 2017 financed the acquisition of the Ponderosa and Bonanza steakhouse chains using funds raised from Regulation A+ IPO.
Such IPOs, also known as “mini-IPOs,” enable companies to raise a smaller amount of money by appealing directly to customers, but which comes with lighter regulatory scrutiny. Fat Brands raised $24 million this way, making it one of the strongest of those IPOs. The company went public at $12 a share. Its value declined shortly thereafter and it has only spent a few brief weeks above that level in the years since then. Fat Brands ultimately settled a shareholder lawsuit accusing the company of misleading investors in the IPO.
Questions about Wiederhorn’s past were common as the offering was filed and Wiederhorn routinely answered them by denying he had any intent of breaking the law, blaming the episode on “mistaken legal advice.”
In the years since the company went public, Wiederhorn has used Fat Brands as a vehicle for aggressive acquisitions. Initially, those deals were small, usually of struggling concepts with a few units at most. It also struggled to get financing. At one point, in 2019, it borrowed $20 million from Biglari Holdings, the owner of Steak n Shake, with a 20% interest rate. Fat Brands also used seller financing and other mechanisms to make a $10 million purchase of Elevation Burger that year.
The tenor of Fat Brands’ deals changed almost on a dime in 2020. That year, the company paid $25 million for Johnny Rockets. In 2021, Fat Brands went on an almost unprecedented buying spree, spending about $900 million on a series of big acquisitions, of Twin Peaks, Global Franchise Group and Fazoli’s. The company used an expanding securitization strategy to fund such deals—essentially loading Fat Brands up with debt.
But it was another merger that has raised most questions. In 2020, Fat Brands merged with Wiederhorn’s Fog Cutter. The company argued that it freed the company up to make bigger acquisitions.
Shareholders in a lawsuit filed in Delaware last year accused Wiederhorn of shifting $50 million in debt from Fog Cutter to Fat Brands, then using the merger to erase that debt. In the process, the moves erased personal loans Fog Cutter made to Wiederhorn, according to legal filings.
The investigation from the SEC and U.S. Attorney apparently follow many of the lawsuit’s allegations. The agencies are also looking into payments made to Wiederhorn and members of his family. The Los Angeles Times suggested that Wiederhorn and his family made credit card purchases for jewelry, a down payment on a Rolls-Royce and payments to a divorce attorney, using an account from Fat Brands. Much like almost every other Wiederhorn financing mechanism, the issues at work here are complex.
The loans from Fog Cutter to Wiederhorn “were completely legitimate and were independently reviewed and approved,” Fuchs said. “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.”
Wiederhorn has yet to be charged, and it remains to be seen if he ever will—charges could take some time. Yet they’ve already taken a bite out of Fat Brands’ share price. Its stock closed down 23% on Tuesday.