(CN) – Shareholders launched a securities class action against FAT Brands Inc., claiming the company misrepresented the financial strength of its restaurants in the lead-up to an initial public stock offering.
Lead plaintiff Eric Rojany filed the complaint in the Superior Court of California naming Fat Brands, CEO Andrew Wiederhorn, Fog Cutter Capital Group and others as defendants.
In 2011, FCCG acquired the restaurant Fatburger, where Wiederhorn also served as the CEO of the restaurant chain.
Wiederhorn is a convicted felon jailed in 2004 for filing false tax returns and to an illegal bribe to Capital Consultants, which caused losses of roughly $350 million in union pension money to fraudulent and failed investments, according to the complaint.
The CEO’s incarceration was called a “leave of absence” where he retained his seat on the board of directors while in prison, to which Wiederhorn received a $2 million leave of absence bonus, the same amount he was ordered to pay in restitution for his felony charges.
Meanwhile, in 2009, Fatburger subsidiaries were given notice by their financier, General Electric Capital Business Asset Funding Corporation, for default and demand of payment for a $3.85 million loan. Fatburger was unable to make payments under the loan which caused several restaurants in the chain to file for bankruptcy.
Following the bankruptcy filings, the NASDAQ delisted FCCG’s common stock for failure to file financial reports with the Securities Exchange Commission in a timely manner. Because of the delisting, FCCG’s eight million shares became worthless, the complaint states.
Prior to the IPO, FCCG owned 100 percent of the shares of common stock until, in 2017, FAT Brands was formed as a corporation for the sole purpose of completing an IPO, according to the complaint.
FAT Brands owned two franchised casual dining restaurants at the time of the IPO including Fatburger and Buffalo’s Cafe/Buffalo’s Express. FAT Brands also intended to complete an acquisition of the Ponderosa and Bonanza Steakhouses with the consummation of the IPO.
After FAT Brands was formed, the class claims the plan was to sell two million shares of company stock, offering $12 per share and raising $24 million in gross proceeds, a cash injection that would still leave FCCG’s ownership intact with 80 percent of the total voting power in the company. FAT Brand’s goal was to use the proceeds for the purchase of the Ponderosa and Bonanza steakhouses while using a remainder to pay FCCG’s debt.
FAT Brand’s board of directors then commenced a multi-city roadshow to market the stock to the investing public. The roadshow helped secure the two million shares under the IPO the company was seeking to sell, according to the complaint.
FAT Brands later held a webinar showcasing a video to show that FCCG would continue to hold the majority share at 80 percent but omitted that the Wiederhorn family owned the majority of the shares at 75 percent, making a single family the majority shareholders and not FCCG as indicated. FAT Brands also failed to disclose a planned merger from FCCG into FAT Brands which would effectively allow the Wiederhorn family to take FCCG public without undertaking a formal IPO process, according to the complaint.
During the webinar FAT Brands also failed to mention that the free cash flow was not enough to cover the 48 cent per share dividends offered by the company.
Wiederhorn spoke highly of FAT Brands’ margins, claiming they were “very, very strong,” while Fatburger and the newly acquired steakhouses showed a downturn in 2017 profits at the time of the IPO.
The IPO was initially successful for the company, however, “the price of FAT Brands common stock later plummeted as the market learned the truth about FAT Brands’ business metrics and financial prospects at the time of its IPO.”
“FAT Brands’ stock now trades at approximately $7 per share, down more than 40% from the price the stock sold at in the IPO,” according to the complaint.
The class is represented by James Jaconette, Samuel Rudman, and Mary Blasy of Robbins Geller Rudman & Dowd LLP in Melville, N.Y. and Frank Johnson and Phong Tran of Johnson Fistel in San Diego.