FAT Brands on defense over DOJ, SEC accounting misconduct allegations

FAT was charged with two counts of extension and maintenance of credit in the form of personal loan from issuer to executive officer, according to an indictment announced by the U.S. Attorney’s Office for the Central District of California on Friday. In a related matter, the Securities and Exchange Commission (SEC) charged FAT with fraud regarding its disclosures about related person transactions with Andrew Wiederhorn, the company’s former chief executive officer and current chairman, and his family.

FAT, which owns restaurant brands Fatburger, Johnny Rockets, Twin Peaks, Smokey Bones, and more, said in a statement it would “take all necessary action to defend itself” regarding charges it described as “unprecedented, unwarranted, unsubstantiated, and unjust.”

The details: From around 2010 through about January 2021, Wiederhorn caused FAT and an affiliate, Fog Cutter Capital Group, to compensate him through approximately $47 million in distributions categorized as “shareholder loans” to conceal the true nature of the payments from the company board, auditors, shareholders, and the SEC, according to the DOJ’s indictment.

Wiederhorn caused FAT and its affiliate to extend to him and forgive the tens of millions of dollars in loans while paying no income tax on them and using them to generate net operations losses that provided the company with financially beneficial tax treatment, according to the DOJ.

The alleged scheme was aided by a former managing director at tax advisory firm Andersen and FAT’s former chief financial officer, Rebecca Hershinger, who were charged by the DOJ alongside the company and Wiederhorn. Another former FAT CFO, Ron Roe, was charged by the SEC regarding his alleged role in making it appear the money Wiederhorn was allegedly spending on himself was company loans to FAT’s affiliate.

SOX 402 prohibits direct and indirect extensions of credit to public company CEOs in the form of personal loans.

Compliance considerations: FAT said in its statement the DOJ’s charges “ignore the company’s cooperation with the investigation,” while the agency alleged Wiederhorn prevented the company from cooperating by removing every director other than himself in March 2023 and reconstituting its board with a majority of nonindependent directors.

The SEC’s complaint faulted FAT for not reporting the fund transfers as related person transactions that required disclosure. The agency is seeking injunctions, civil penalties, and disgorgement plus prejudgment interest against the company in its litigation.