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Has Fatburger Resolved Its Nasty Little Problem?

California removes order to terminate registration, connected to chairman’s felony convictions

According to Susie Wong, California’s Department of Corporations’ director of communications, Fatburger is no longer refrained from selling franchises in the state. The Department had issued an order in April consenting to Fatburger’s withdrawal of its application for registration, but in October 2006, it granted Fatburger’s request for a Notice of Exemption, after meeting with the franchisor’s attorney. 

Fatburger’s outside counsel Kenneth Costello, Bryan Cave, said, “Fatburger has obtained an exemption as a large franchisor.” He explained that a company with a $5 million net worth—in this case a parent company with over $5 million and its franchisor with over $1 million—is entitled to the exemption under California law.   

Fatburger’s parent company, Fog Cutter Capital Group, Inc., in its SEC filings for September 30, 2006, reports that it invested an additional $5 million in Fatburger and increased its voting control to 82%. 

According to a letter (pdf) Costello wrote to the state in February, the Department of Corporations had initially informed Fatburger that it would not approve its post-effective amendment application, which added Andrew Wiederhorn as a director.  Wiederhorn, Fog Cutter’s CEO/chairman, is a convicted felon who pleaded guilty and served an 18-month prison sentence, which ended in February.   

The Department advised Fatburger to withdraw its application and cause Wiederhorn to resign as director of Fatburger or their request for registration would be turned over to the Enforcement Division for an issuance of a stop order.  Costello explained that their same amendment had been filed and approved by the states of Minnesota, New York, South Dakota, Virginia and Washington.  

While they appreciated the Commissioner’s concern that there might be a risk to franchisees with Wiederhorn in the sale or management of the franchise, Costello reminded the Department that “there are many franchisors who continue to be registered in California despite having pages of disclosures about concluded litigation holding them liable for fraud, embezzlement, fraudulent conversion, or misappropriation of property.”  

Wiederhorn’s Unfortunate Incarceration

Although Wiederhorn had pled guilty in 2004 to the two felony charges, one for filing a false tax return and the other for paying an illegal gratuity to Capital Consultants—which lost some $350 million in union pension money to fraudulent and failed investments—he never admitted to wrongdoing in the matter. He maintained that it was wrong for the government to prosecute him for a non-intent crime involving a business transaction by his former employer, Wilshire Financial Services Group, Inc. He insisted it was a transaction which had been approved by Wilshire’s in-house counsel and other attorneys.   

Fog Cutter dubbed his incarceration as a “leave of absence” and retained his seat on the board of directors until his return. It not only paid Wiederhorn his $350,000 salary while in prison, but also a $2 million “leave-of- absence” bonus, the same amount he was ordered to pay in restitution for his crimes.  (He paid an additional $25,000 in fines.)  

But the Department of Corporations persisted and in April issued its final answer, after reviewing all material submitted by Fatburger counsel, including Wiederhorn’s declaration of his conviction.  Again it advised it would deny the franchisor’s application based on the fact and nature of the convictions, and they would take action on April 20, 2006, if they did not meet the state’s requirements.  

In Costello’s timely reply to the Department, he said not only was Fatburger withdrawing its application effective immediately, but was also withdrawing its entire California franchise registration.  He acknowledged that the franchisor was no longer registered and could not offer or sell franchises in the state, and as a result, there was no need for them to issue a stop order. 

Costello’s request for a personal meeting with the Department’s representatives was then granted, not to discuss the felony convictions but to discuss alternatives for his client.  After their meeting, Fatburger received the Notice of Exemption, qualifying it as a large franchisor with no registration requirements in California.   

Fatburger, early-on labeled The Last Great Hamburger Stand, was founded in 1952, but it didn’t sell its first franchise until 1990. Today it has a total of 86 restaurants, 32 company-owned and 54 franchised, which includes approximately 40 in California.  According to the Fog Cutter web site, the franchisor has agreements for another 230 franchises in the United States and Canada.  

The Portland Business Journal, reported recently that Fog Cutter conducts its operations in five business segments: restaurant operations through its Fatburger subsidiary; commercial real estate mortgage brokerage operations through its subsidiary, George Elkins Mortgage Banking Co.; manufacturing activities conducted through its DAC International subsidiary; real estate operations; and software development and sales conducted through its Centrisoft Corp. subsidiary. 

The journal stated that Fog Cutter made most of its third-quarter revenue from its Fatburger restaurant operations. 

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Costello letter Feb 22 2006.pdf149.17 KB
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