Has Fatburger Resolved Its Nasty Little Problem?

Interesting smoke and mirrors trick. Fatburger is banned because the holding company's CEO is a convicted felon. To their credit, the State of California will not allow small franchisers to have franchise directors who are felons. But when the holding company transfers $5 million to meet the requirements as a large franchiser, Fatburger can have felons (Wiederhorn) involved in its leadership. Large franchisers are exempt from such silly rules.

There's two lessons I take away.

• Lesson 1. Lawyers are smart.
• Lesson 2. How Easily the System Is Bent When You Have Money

Who sang, "money can't buy you love"? They obviously weren't in franchising.

--

dw 

I can agree with The Beetles being a great band.  Although not in Franchising, they were certainly one of the great franchises of all time, far more so, than DEM FRANCHIZE BOYZ who recently graced us with their presence here at Blue Maumau.

I do not see anything here that would indicate that:

• Any Regulators were ‘bought’ or paid to look the other way; or
• That the ‘System’ was Bent in any way; or
• That there were any ‘smoke and mirror’ tricks involved.

It actually sounds to me as though the system worked and worked well.  California objected to Fatburger’s application for registration based on the law, and Fatburger was able to receive a Notice of Exemption based on the law. 

As it was pointed out Fog Cutter and its board of directors found enough value in Wiederhorn’s past and future contributions to the organization that it was willing to pay him his $350,000 salary while in prison and a $2 million dollar bonus to pay his court ordered restitution.  This in spite of the fact that he was ‘out of service’ for 18 months and that his felony conviction would now need to be disclosed in item #4 of their UFOC.  Obviously someone thought he brought enough value to the franchise organization to justify these actions.

It should also be pointed out that the sentencing judge could have banned Wiederhorn from being involved in any franchising activities, if s/he had felt that Wiederhorn posed any kind of threat to current or future franchisees.  Obviously, this was not the case. 

I do not believe that the State of California provides an exemption to large franchisors, because they’re afraid of ‘an army of lawyers’.  The State of California has more attorneys on staff in a single county than the largest franchisor could or would retain, and access to far more money than the largest franchisor has access to.  Exemptions are provided to both individuals and businesses of all sizes who meet certain criteria.  These exemptions are provided for a variety of reasons, and almost always based on the entity receiving the exemptions ability to meet the same standards of an entity without such exemption.  For instance most of us, in most states, are required to carry a certain amount of liability insurance prior to operating a motor vehicle.  However, most of these states also provide provisions which allow us to self-insure if we have the financial wherewithal to do so.  Why is this allowed?  Because based on the criteria it is believed that an injured party would be able to obtain the same level of relief from the self insured as they would be able to from someone insured by State Farm.

I think a far greater injustice would have resulted from forcing Senior Leadership out of an old, established organization whose leadership is and has been responsible for growing the business.  What if as a result of such actions the franchisor went out of business, taking down 86 local operating businesses each of which pays property taxes, employment taxes, and generate sales taxes?  What about the more than 1,000 employees who may have lost their jobs?  What about the franchisees who would have lost their investment and livelihood?

Do we want felons who have been found guilty of defrauding franchisees involved in franchising, NO!  Do we want felons who have been found guilty of defrauding potential franchisees selling franchises, NO!  But do I think that a 40 year old Senior Executive of a multi-million dollar franchising organization should be prevented from working in franchising simply because s/he was convicted of felony DUI or drug possession charge 20 years earlier.  No, I do not!  I think common sense must play a role.  I know a lot of people in franchising, who have been in franchising for a long time, who have made major contributions to franchising, who have helped 1,000’s of people accomplish their dreams of becoming a business owner, who would not have done these things had the simply gotten caught driving home one night after one too many.

Fatburger’s/Fog Cutter felt Mr. Widerhorn was worth an 18-month wait, and more than 2 million dollars.  Now, I think we wait and see what Fatburger current and future franchisees think!  But that’s just my opinion, what’s yours?

 

Believe & Succeed,
FranSynergy
Synergizing Franchising 1 Franchisee at a time!
www.fransynergy.com

There are examples of regulatory capture, but California franchise regulation is not one. There are some states which are very cozy with the big franchisors and their counsel, but historically California has been zealous (some would say excessively so) in regulation of franchisors.

What concerns me is the collateral damage here: if California had prohibited the sale of franchises (or if the franchisor had withdrawn from the state rather than comply with California's demands) the innocent franchisees unable to renew or sell their franchises would be the victims. This is an often-overlooked risk factor for franchisees, and while it can occur through market withdrawal (Baskin Robbins, Volvo) it can also occur through state action as in the Fatburger instance.

As to giving an exemption based on the assets of the "parent" company: This is rather disingenuous given the privity issue. Unless the parent is signing an unconditional guarantee for the actions of another entity the assets of the "parent" may not be reachable. Most famously, see the Janotta case where the assets of the franchisor "parent" were properly held to be unreachable to satisfy a judgment against the real-estate arm of the franchisor. I have seen lawyers who have difficulty with the concept of contractual privity, but it is not that hard to understand: if you are a entering into ANY contract, be aware that your recourse against any party not a signatory to the contract may be barred as a matter of law.

As to Fatburger: on the facts as presented by Ms. Sparks, I would doubt that the franchisees have anything to worry about and so long as there is full disclosure this would seem to be one of those instances where the regulators may choose to let the prospective purchasers make their own evaluation. Some may disagree, but the offense pled to arguably is one not indicative of prospective harm to franchisees or the public at large.

--Paul Steinberg, pwsteinberg@msn.com

Steinberg: I would doubt that the franchisees have anything to worry about and so long as there is full disclosure this would seem to be one of those instances where the regulators may choose to let the prospective purchasers make their own evaluation.

Another good point.

Large franchisers have a higher degree of public scrutiny and so I understand the exemption. For example, there's a lot that a franchise buyer can find out from McDonald's, CKE, EEEE or other publicly traded franchising organizations. Unlike franchising, if they are a publicly traded firm like Fog Cutter, they are regulated up the ying-yang by the SEC - to the benefit of the franchise buyer. Financial statements, what the market thinks of the firm, earnings, and so much more are included. For example, for some reason the market doesn't think too much of Fog Cutter over the last year (it's the dropping one-year line in this Yahoo chart).

Wiederhorn was convicted for tax evasion and bribery (illegal gratuity). But he has paid his debt. As both of you gentlemen point out, the felony will be mentioned in Item 3 of the UFOC, and in corporate statements to the SEC. It shouldn't be hard to find. I wonder if that is what persuaded California's Department of Corporations to allow Fatburger to have a convicted felon as a director. As a public company, Fog Cutter would necessarily have quite a paper trail about the conviction so franchise buyers can make informed decisions.

With all of that in mind, does anyone have any idea why the Department of Corporations required Fatburger to transfer $5m to be exempt as a large franchise?

Frankman

1.  Wiederhorn's background:

"Back in the go-go '90s, a hotshot named Andrew Wiederhorn (above) got into the "distressed loan" business--buying up bad debts and convincing deadbeats to pay up. Through a series of questionable deals, Wiederhorn managed to parlay this unlikely source of revenue into a $140 million fortune under the umbrella of Wilshire Financial Services Group. Then, in 1999, Wilshire collapsed."

For the entire story see here.

2.  In December 2005, the NASD delisted Fog Cutter Capital Group:

"The Commission dismissed Fog Cutter Capital Group, Inc.'s appeal of
NASD's delisting of Fog Cutter's securities. The Commission concluded
that NASD, acting on public-interest grounds, properly delisted Fog
Cutter to protect the integrity of, and public confidence in, the
Nasdaq market. NASD's delisting was based on the 2004 guilty plea of
Andrew Wiederhorn to two federal felony violations and the Fog Cutter
board's reaction to the investigation and conviction of Wiederhorn.

Wiederhorn was Fog Cutter's chairman, chief executive officer, and
controlling stockholder. The Commission found that, in 2003, Fog
Cutter's board knew Wiederhorn was under investigation by a federal
grand jury. The board, acting on at Wiederhorn's behest, renegotiated
his employment agreement to provide that conviction of a felony not
involving Fog Cutter would not be cause to terminate Wiederhorn. The
Board was aware that the alleged violative conduct, although
felonious, did not involve Fog Cutter."

3. For Wiederhorn's side of things, see here

4. Finally, for those who like ponzi schemes, read here about what happened to Wiederhorn's company.

Yeah, I really want this guy running my franchise. Very reassuring.

Michael Webster PhD LLB
Psychology of Compliance and Due Diligence Law www.bizop.ca

Proper regulation of markets can help in preventing déjà vu.

dé·jà vu n. Psychology. An impression of having seen or experienced something before: Old-timers watched the stock-market crash with a distinct sense of déjà vu. Dull familiarity; monotony: the déjà vu of the tabloid headlines.  

There is a history in this country where regulation has benefited the marketplace and acted in the best interests of its citizens to raise the bar and prevent future abuse. One of the best examples is the Securities and Exchange Commission, (SEC) that oversees the robust securities and investment marketplace.

I’m sure the employees of Enron and other companies trusted in the motto Fransynergy publishes on his posts “believe and succeed”. Those same employees were sorry to learn that their retirement savings were made worthless by the felonious acts and misrepresentations by the Enron leaders.

Because of the convictions and disastrous results of the Enron debacle, which the ripple effects will probably be felt for years, just ask any Californian who pays electric bills.Based on the well documented events of Enron the SEC has made moves to help prevent disastrous consequences for those least able to afford them.

There is always a balance between proper regulation and over regulation and there is a time where deregulation can have positive effects on the marketplace.The disclosure requirements of Item #3 of the UFOC are to advise everyone whether the principals have any felony convictions against them.

The Fatburger situation is probably a case where the felony since it does not relate to franchising and may have little to no bearing on a prospective franchisees investment. It’s up to the prospective franchisee to decide.

Paul Steinberg posted early in this track that “I would doubt that the franchisees have anything to worry about and so long as there is full disclosure this would seem to be one of those instances where the regulators may choose to let the prospective purchasers make their own evaluation. Some may disagree, but the offense pled to arguably is one not indicative of prospective harm to franchisees or the public at large.”

Jim Coen, Franchise Perfection, 877-469-3002, jim@franchiseperfection.com, www.franchiseperfetion.com

I don't want to defend a convicted felon, I'm not even an attorney.

There are 40 existing Fatburger franchisees in the State of California, they have rights too, most of those franchises were opened far before Wiederhorn was involved in Fog Cutter and before he served time in jail. 

I'm just saying that the fact that Fog Cutter employs a convict and invests in Fatburger as disturbing as that situation is the post above states it was disclosed in Fogcutters UFOC application.

In the other "non registration" states that disclosure in item #3 would be enough, as long as they disclose that he was a convicted felon, they comply with disclosure.

I don't think it should preclude existing franchisees from reselling or transfering their franchise.  It sounds to me that the franchisees would be unduly penalized for the felonies of directors of the franchisor. 

Jim Coen, Franchise Perfection, 877-469-3002, jim@franchiseperfection.com, www.franchiseperfetion.com

According to Forbes (Oct 15 2007, page 46, by Dorothy Pomerantz, or online ), same-store sales at Fatburger are plunging.

The article also paints a very unflattering picture of Andrew Wiederhorn (and his criminal activities) as well as the prospects for Fatburger; celebrity franchisees apparently are just like normal franchisees-- investing in a good story but not paying attention to the underlying fundamentals of the business.

Fatburger's parent company is also reported to have a "dwindling cash pile" and Wiederhorn is "delinquent on a $1 million loan from the company."