FAT Brands chairman Andy Wiederhorn on May 10 was indicted on federal charges covering an array of claims. Among them the accusation Wiederhorn concealed $47 million in shareholder loans from the IRS, stockholders, and the broader investing public. It was a wide-ranging document that included former CFO Rebecca D. Hershinger and public accountant William J. Amon, who were said to assist Wiederhorn on hiding reportable and taxable income and evading millions in taxes, which allegedly caused FAT Brands to violate a federal law prohibiting direct and indirect extensions of credit to public CEOs in the form of a loan.

Douglas Fuchs, Andy Wiederhorn’s counsel, addressed the charges with QSR.

Firstly, Fuchs rejected the government’s assertion Wiederhorn orchestrated a secret scheme to defraud investors. “Mr. Wiederhorn relied on globally respected tax, legal, and accounting experts in every aspect of his business and financial life,” Fuchs says. “These experts—not Mr. Wiederhorn—prepared all financial statements and securities filings. External auditors, outside counsel, and internal finance professionals for FAT knew of the intercompany loans by FAT to Fog and the shareholder loans from Fog to Mr. Wiederhorn. They believed the disclosures in those documents were accurate and still do.”

Wiederhorn was charged with a count of endeavoring to obstruct the administration of the Internal Revenue Code, six counts of tax evasion, one count of false statements and omission of material facts in statements to accountants in connection with audits and reviews. Wiederhorn and Hershinger were charged with four counts of wire fraud, two of false statements and omission of material facts in statements to accountants in connection with audits and reviews, and one of certifying faulty financial reports.

Wiederhorn, Hershinger and FAT Brands were charged with two counts of extension and maintenance of credit in the form of personal loan from issuer to executive officer. Hershinger was also charged with a count of making false statements to federal investigators, including denying company funds were being used to pay Wiederhorn’s personal American Express bill.

Amon was charged with four counts of aiding and assisting the filing of false tax returns.

The indictment alleges, beginning no later than 2010 and continuing through early 2021, Wiederhorn caused employees for FAT Brands and Fog Cutter Capital to give him roughly $47 million for personal use and benefit. Wiederhorn, Amon, Hershinger, and others mislabeled these as shareholder loans and didn’t report the compensation to the IRS, SEC, and broader public, according to the government. Wiederhorn and his family members allegedly used these disbursements for private jet travel, vacations, a Rolls Royce Phantom, other luxury cars, jewelry, and a piano.

Fuchs counters the loans between FAT Brands and Wiederhorn’s family office (Fog Cutter Capital) were legitimate and fully disclosed.

“Fog owned 82 percent of FAT shares, and Mr. Wiederhorn owned most of Fog as well,” Fuchs says. “His entire net worth was tied up in FAT stock. He’s being accused of essentially loaning money to himself from the company he fully controlled, while paying his minority partners their share. Loans from FAT to Fog were disclosed in FAT’s financial statements and SEC filings and known to all investors in FAT. Shareholders controlling the remaining 18 percent of FAT’s shares were fully compensated for their share of the loans through the issuance of preferred stock. The loans from Fog to Mr. Wiederhorn were separate transactions that FAT’s internal financial professionals, outside counsel, and outside auditor determined did not need to be disclosed in FAT’s SEC filings and were found to be legitimate loans by one of the world’s leading tax advisory firms.”

Going back, FAT Brands in December 2020 entered into an agreement to combine with Fog Cutter Capital Group Inc., which was its controlling stockholder at the time. The company, founded by Wiederhorn, held more than $100 million of net operating loss carryforwards (NOLs), which it said could only be made available to FAT Brands as long as Fog Cutter owned at least 80 percent of FAT Brands. With the combination, the NOLs would be internalized at FAT Brands, allowing more optionality in capital structure. The deal came months after FAT Brands acquired Johnny Rockets.

It was a deal in the works before COVID as well, with Wiederhorn sharing in 2019 it was expected to be completed that year. And it followed a 2017 tax sharing agreement made with the firm in which Fog Cutter would file consolidated federal and state income tax returns with the company and its subsidiaries. FAT Brands then would pay Fog Cutter what its current tax liabilities would have been if it filed a separate return.

FAT Brands adjusted the strategy as it began to aggressively acquire chains. It typically paid cash and some seller notes or preferred stock. But it couldn’t issue stock thanks to the ownership structure of Fog Cutter, which made it more difficult to use the NOLs to shelter tax liabilities. The merger, however, allowed NOLs to fall under FAT Brands’ entity structure and the 80 percent ownership requirement disappeared.

Importantly, this gave FAT Brands the ability to make acquisitions using common stock, or to issue more common stock to raise capital and still get the full benefit of the NOLs.

FAT Brands would end up paying $2.5 million, plus an additional half a million in stock, to settle a lawsuit that stemmed from the merger as shares lost as much as a fifth of their value afterward. Shareholders who acquired stock between December 2017 and February 2022 sued over the decision. The company said the time settling didn’t admit liability, but it was the best decision to remove “the distraction, expense, and risk of continued litigation.”

Into the present, FAT Brands and Fog Cutter didn’t require Wiederhorn to post collateral, make interest payments, or observe any commercial requirements of a typical true loan. The executive also allegedly determined the amount, timing, and form of both extension and forgiveness of these so-called loans without informing the directors of FAT Brands or Fog Cutter. The indictment outlined several transfers of hundreds of thousands of dollars that came directly from FAT Brands accounts to pay for Wiederhorn’s personal American Express credit card debts.

“Wiederhorn, posing as both ‘lender’ and ‘borrower,’ caused defendant FAT and FOG to extend to him and then ‘forgive’ tens of millions of dollars in distributions made in the fraudulent form of loans—all while paying no income tax on these distributions and, in fact, using them to generate net operating losses to provide defendant FAT with financially beneficial tax treatment,” the indictment alleged.

Fuchs maintains Wiederhorn employed a fully legitimate tax deferral strategy.

“Mr. Wiederhorn borrowed against stock, just like countless other high-net worth individuals. He will pay the full balance of the taxes he owes when he sells his shares or other assets,” he says. “Cancellation of debt is exceedingly common, as is the use of Section 108. In fact, in 2020, 510,000 tax returns reported $4.9 billion in COD income.”

Federal officials also accused Wiederhorn of removing every other board director but himself in March 2023 after members communicated with investigators. He allegedly reformed the board with a majority of non-independent directors under his control. At that time, Wiederhorn announced he would step down as CEO so he wouldn’t be a distraction to the company. But he remained as chairman. The board was replaced with a new group that includes three of Wiederhorn’s children—Mason, Taylor, and Thayer Wiederhorn—and their grandfather, Donald Berchtold.

In early 2022, it was revealed that Wiederhorn was under federal scrutiny due to criminal allegations involving him and his family, such as securities fraud and money laundering. December 2021 saw a police raid at the residence of Wiederhorn’s son Thayer and his daughter-in-law.

Wiederhorn claimed the probe was triggered by a shareholder lawsuit that accused him of misconduct during the merger of FAT Brands with Fog Cutter toward the end of 2020. The lawsuit alleged Wiederhorn benefited from millions in loans from Fog Cutter, which it had obtained by borrowing from FAT Brands. These loans were later forgiven by Fog Cutter, which still had outstanding debts to FAT Brands. The suit further accused Wiederhorn of arranging the merger between Fog Cutter and FAT Brands to erase this debt.

According to the indictment, Wiederhorn began hiding distributions to himself in the form of shareholder loans about three decades ago while serving as CEO of Wilshire Credit Corporation (WCC). After forgiving himself $65 million in debts owed to WCC, he pleaded guilty in 2004 to the payment of illegal gratuities and filing a false tax return. He served 14 months in prison.

From at least 2006 to 2021, the IRS tried to collect personal income tax and trust fund taxes Wiederhorn owed personally and as a responsible party and guarantor for certain companies, including Fog Cutter. The IRS placed levies and liens on his accounts and assets due to outstanding taxes owed. Starting in 2016, the federal agency began assessing penalties for Fog Cutter’s inability to pay trust fund taxes and establish a payment plan. By March 2021, Wiederhorn’s unpaid personal income tax liability totaled $7.7 million.

Fuchs also rejected the government’s claim Wiederhorn misled the IRS about his ability to pay historical income taxes.

“Mr. Wiederhorn did not mislead the IRS, and all of his taxes have been paid,” Fuchs says. “He not only personally took on the additional responsibility to pay business employment tax debts but also fully satisfied and paid all assessed back taxes, with penalties and interest, totaling over $10 million.”

Tyler Hatcher, special agent in charge for IRS Criminal Investigation out of the Los Angeles field office, said Wiederhorn’s actions “over decades hurt not only his company and its shareholders, but also every American taxpayer.”

“Failing to honestly and accurately report income shortchanges Americans, and places undue strain on honest taxpayers,” he said in a statement.

Fuchs refuted this sentiment as well, claiming shareholders have profited substantially from their investment in FAT Brands.

“The company has effectively executed the plans disclosed to investors, doubling the number of restaurant brands from nine as of March 2021 [8-K/A] to 18 today,” he says. “FAT Brands’ systemwide sales have grown sevenfold since 2020 to $2.5 billion in global sales across 40 countries. Despite the challenges the restaurant industry faced during the COVID-19 pandemic and the continuing soft capital market, FAT Brands’ stock price remained strong. We believe that this government investigation and indictment have been the only major events that caused significant downward pressure on the stock. Mr. Wiederhorn is a talented entrepreneur who built FAT Brands from nothing through hard work and persistence. He has created tremendous value for shareholders and done nothing wrong.”

FAT Brands today directs about 2,300 locations, 185 of which are corporate. There are 800 franchisees (half are single-unit operators). And there’s a pipeline of 1,100 units after the company opened 125 in 2023, with the same cadence on deck for 2024. That four-digit growth would raise FAT Brands’ adjusted EBITDA by about $60 million.

FAT Brands, as Fuchs mentioned, grew exponentially through the pandemic. Following the $25 million deal for Johnny Rockets in September 2021, the chain went on an acquisition spree. In just 2021, it brought in Global Franchise Group (Round Table Pizza, Great American Cookies, Marble Slab Creamery, Hot Dog on a Stick, and Pretzelmaker) for about $445 million, Twin Peaks for $300 million, Fazoli’s for $130 million, and Native Grill & Wings for $20 million. The company paused to absorb an onslaught of integration before acquiring Nestlé Toll House Café in late 2022 and, most recently, adding Smokey Bones for $30 million in 2023.

FAT Brands is in the process of taking Twin Peaks and Smokey Bones, the latter of which are converting to Twin Peaks in many cases, public.

Brian Hennigan of Hueston Hennigan LLP, counsel for FAT Brands, said the company was told it has been indicted on two violations for arranging roughly $2.65 million in loans to Wiederhorn. He called the charges “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,” the lawyer said in a statement.

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