Fatburger Owner Faces Allegations It Masked Liquidity Crunch

(Bloomberg) — A shareholder of FAT Brands Inc. is suing the restaurant chain owner, alleging it hid the true size of its debt amid a worsening financial outlook that saw its shares fall to their lowest level in years this week.

The company, which owns Fatburger and Johnny Rockets, has resorted to high-interest loans, known as merchant cash advances, as its finances have deteriorated since late November, according to a pair of complaints filed in Delaware Chancery Court. The shareholder accuses FAT Brands of misrepresenting debt as cash to obtain new financing.

According to one of the complaints, the MCAs, along with other transactions “designed to artificially inflate its cash position and conceal liquidity problems,” indicated deeper problems with the firm’s finances that were “not properly accounted for in FAT’s publicly disclosed financial statements or disclosed to investors.”

FAT Brands warned in late November that it might have to file for bankruptcy after creditors demanded repayment of its entire business securitization debt of about $1.2 billion; this amount was an amount the company was “not prepared to pay”. Rising costs and competition have driven many casual dining chains into bankruptcy in recent years; Among them, there are those who carry a large portion of this debt, with franchise companies providing most of their assets as collateral.

Shareholder Kevin Gordon claims the company is more than $1.4 billion in debt and is unlikely to repay its lenders. Gordon, whose FAT Brands shares were worth about $1,650.60 on Dec. 1, began looking into the matter after a “failed transaction” between FAT Brands and Alagna Advisors, which lists Gordon as global head of structured credit on its website.

FAT Brands must respond to the complaint by next week, according to court rules. A representative for the company declined to comment. Alston & Bird attorney Scott Schirick, who represents Gordon, declined to comment.

The company’s shares hit their lowest level in more than five years earlier this week and are down nearly 85% so far this year.

FAT Brands’ financial troubles raise the prospect of potential pain for debt holders, including 352 Capital, a hedge fund backed by Leucadia Asset Management, the asset management arm of Jefferies Financial Group Inc.

Jefferies began shutting down 352 last year after suing former portfolio manager Jordan Chirico. Jefferies claimed that he invested more than $100 million in a pyramid-like fraud connected to a water vending company.

Shortly before the lawsuit, Chirico had joined FAT Brands as head of debt capital markets. He left the company following Jefferies’ allegations.

Leucadia has come under increased scrutiny in recent months following the collapse of First Brands Group amid allegations of fraud by the auto parts supplier. Point Bonita Capital, a fund Leucadia oversees,’s exposure to the bankrupt First Brands left Jefferies facing potential losses as some vehicle investors headed for the exits.

Representatives for Jefferies and Hildene Capital Management, which is assisting Jefferies with the liquidation of 352, declined to comment on the bond holdings.

Now FAT Brands shareholder Gordon is seeking access to the firm’s books and records. One of the complaints alleges that FAT Brands conducted a series of bond sales starting last year, including to Axonic Capital and Barclays Plc’s U.S. unit.

The agreements included a put option requiring FAT Brands to repurchase the bonds at a higher price. But when bond buyers exercised their put option, FAT Brands defaulted, according to court documents.

Rather than accurately reflecting the loan-like obligation created by the put option repurchase obligation, Gordon’s attorneys wrote, FAT Brands “clearly treated these transactions as sales of ordinary securities for cash in order to convince the market, potential investors, and potential lenders that its liquidity position was not as bad as it once was.”

A representative for Barclays declined to comment. Axonic representatives did not immediately respond to a request for comment.

Around March or April, FAT Brands began receiving cash advances of as much as $15 million at effective interest rates of up to 45% as it “embarked on a reckless, high-interest, short-term corporate borrowing spree,” according to court documents.

Separately, FAT Brands sued Alagna Advisors in July in New York State Supreme Court over a different bond swap, claiming the investment advisory firm failed to pay FAT Brands some of the money it owed from that deal. A separate request to Gordon at Alagna regarding the cases was not immediately returned.

Gordon also alleges a number of related-party transactions were made to FAT Brands Chief Executive Officer Andy Wiederhorn and his children, including payments that were supposed to be used to repay debt, according to the documents.

Twin Peaks Hospitality Group, a spinoff of FAT Brands, allegedly allocated approximately $2.2 million in cash bonuses to management and hundreds of thousands of restricted stock units to Wiederhorn and his sons, who were board members and company executives.

Wiederhorn did not immediately respond to a request for comment.

Wiederhorn was indicted last year by the U.S. Department of Justice for allegedly helping to conceal $47 million in shareholder loan payments. The case against Wiederhorn, who donated to campaigns supporting Donald Trump and the Republican Party, was dropped earlier this year.

Wiederhorn settled a separate investor lawsuit for $10 million over similar allegations earlier this week.

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