FAT Brands Faces Lawsuit Over Alleged Financial Misrepresentation

FAT Brands Inc., the parent company of popular restaurant chains such as Fatburger and Johnny Rockets, is facing legal action from a shareholder who alleges the company concealed the extent of its financial struggles. This lawsuit follows a significant drop in the company’s stock, which reached a multiyear low earlier this week.

The shareholder, Kevin Gordon, has filed complaints in the Delaware Chancery Court claiming that FAT Brands misrepresented its debt levels and liquidity situation. He contends that the company resorted to high-interest loans known as merchant cash advances as it grappled with deteriorating financial conditions. According to the legal filings, these funds were used to mask deeper financial issues rather than being a genuine reflection of cash on hand.

In late November, FAT Brands warned investors that it might be forced to file for bankruptcy due to creditor demands for full repayment of approximately $1.2 billion in securitization debt. This amount, the company indicated, was not readily available. The financial difficulties faced by FAT Brands are part of a broader trend affecting several casual-dining chains, many of which have been pushed into bankruptcy due to rising costs and intense competition.

Gordon’s complaint outlines that FAT Brands is carrying in excess of $1.4 billion in debt, raising doubts about the company’s ability to meet its repayment obligations. His concerns were heightened following a “failed transaction” involving FAT Brands and Alagna Advisors, the firm where he serves as global head of structured credit.

FAT Brands has until next week to respond to the allegations. A representative for the company has opted not to comment on the ongoing litigation, while Gordon’s attorney, Scott Schirick from Alston & Bird, also refrained from discussing the case.

Financial Mismanagement Allegations

The lawsuit highlights potential risks for holders of FAT Brands’ debt, which includes 352 Capital, a hedge fund associated with Leucadia Asset Management. This fund is currently in the process of winding down following its own legal issues, which included a lawsuit against a former portfolio manager accused of orchestrating a substantial fraudulent investment scheme.

In the complaints, Gordon details a series of bond sales initiated by FAT Brands to various investors, including Axonic Capital and a division of Barclays Plc. These sales included put options that obligated FAT Brands to repurchase the bonds at inflated prices. Once the put options were exercised, the company allegedly defaulted, casting further doubt on its financial integrity.

Rather than appropriately categorizing the liabilities created by these transactions, Gordon asserts that FAT Brands misrepresented them as standard cash sales. This misrepresentation was aimed at misleading investors and lenders about the true state of its liquidity.

High-Interest Loans and Executive Bonuses

As its financial situation worsened, FAT Brands turned to merchant cash advances, borrowing as much as $15 million at interest rates reaching up to 45%. Gordon’s legal documents describe this as a reckless approach to corporate borrowing, further jeopardizing the company’s financial health.

Additionally, Gordon alleges that related-party transactions, including substantial cash bonuses to Andy Wiederhorn, FAT Brands’ CEO, and his family, should have been allocated to debt repayment instead. The company’s spinoff, Twin Peaks Hospitality Group, reportedly authorized around $2.2 million in cash bonuses to management, alongside significant stock grants to Wiederhorn and his children, who also hold executive roles.

Wiederhorn himself has faced scrutiny, having been indicted by the US Justice Department last year for allegedly hiding $47 million in payments as shareholder loans. Although the case was dropped earlier this year, Wiederhorn recently settled a separate investor lawsuit for $10 million related to similar allegations.

The unfolding legal challenges and financial difficulties at FAT Brands underscore the complexities facing the restaurant industry, particularly in a climate where casual dining chains have struggled to maintain profitability. As the company prepares its defense against the lawsuit, the implications for its investors and creditors remain significant.