Fatburger Owner Faces Allegations It Masked Liquidity Crunch

FAT -3.68%

(Bloomberg) -- One of FAT Brands Inc.’s shareholders is suing the restaurant-chain owner for allegedly hiding the true extent of its debt amid a darkening financial outlook that saw its stock hit a multiyear low this week.

Most Read from Bloomberg

• ICE Plans Detention Expansion With Deal to Design 'Mega Centers'

• With Mamdani, the Humble Bus Gets Its Due

• NYC High Line-Area Building Floats $53 Million Bankruptcy Sale

• NYC’s Adams Challenges Mamdani Rent Freeze With Board Picks

• How This Chameleon UK Location Became a Little-Known Hollywood Backdrop

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

The MCAs, together with other transactions that were “designed to artificially inflate its cash position and disguise its liquidity issues,” suggested deeper troubles with the firm’s finances that weren’t “properly accounted for in FAT’s publicly disclosed financial statements or disclosed to investors,” according to one of the complaints.

FAT Brands warned in late November that it could be forced to file bankruptcy after creditors demanded full repayment on its roughly $1.2 billion of whole-business securitization debt, an amount it didn’t have “on hand to pay.” Soaring costs and competition have pushed several casual-dining chains into bankruptcy in recent years, including some that carried substantial loads of that debt where franchise companies pledge most of their assets as collateral.

The shareholder, Kevin Gordon, alleges the company has more than $1.4 billion in debt and that it was unlikely to be able 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 has until next week to respond to the complaint, as per court rules. A representative for the company declined to comment. Scott Schirick, a lawyer with Alston & Bird representing Gordon, declined to comment.

Shares in the company hit a more than five-year low earlier this week and are down about 85% so far this year.

Debt Holders

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

Jefferies began winding down 352 last year after suing its former portfolio manager, Jordan Chirico. Jefferies alleged he orchestrated an investment of more than $100 million in a Ponzi-like scam tied to a water vending machine firm.

Shortly before the lawsuit, Chirico had joined FAT Brands as its head of debt capital markets. He departed the firm amid Jefferies’ allegations.

Leucadia drew further scrutiny in recent months following the collapse of First Brands Group amid allegations the auto parts supplier engaged in fraud. A fund that Leucadia oversees, Point Bonita Capital, had exposure to bankrupt First Brands, which left Jefferies facing potential losses as some of the vehicle’s investors headed for the exits.

Representatives for Jefferies and Hildene Capital Management, which is helping Jefferies with the 352 wind-down, declined to comment on the bond holdings.

Bond Sales

Now, FAT Brands’ shareholder Gordon is seeking access to the firm’s books and records. In one of the complaints, he alleges that FAT Brands undertook a series of bond sales including to Axonic Capital and a US unit of Barclays Plc beginning last year.

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

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

A representative for Barclays declined to comment. Representatives for Axonic didn’t immediately respond to a request for comment.

Around March or April, FAT Brands turned to the merchant cash advances, taking as much as $15 million with effective interest rates up to 45%, as it “embarked on a binge of reckless, high-interest, short-term corporate borrowing,” according to the court documents.

Separately, FAT Brands sued Alagna Advisors in New York State Supreme Court in July over a different bond swap, alleging the investment advisory firm didn’t pay FAT Brands a portion of money it was owed from that deal. A separate request placed to Gordon at Alagna about the lawsuits wasn’t immediately returned.

Cash Bonuses

Gordon also alleges a series of related-party transactions including payments to FAT Brands Chief Executive Officer Andy Wiederhorn and his children that should have been used to repay debt instead, according to the documents.

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

Wiederhorn didn’t immediately respond to a request for comment.

Wiederhorn was indicted by the US Justice Department last year for allegedly helping to conceal $47 million in payments as shareholder loans. The case against Wiederhorn — who has donated to campaigns supporting Donald Trump and the Republican Party — was dropped earlier this year.

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

Most Read from Bloomberg Businessweek

• Uniqlo Founder and Japan’s Richest Man Loves a $32 Pair of Slacks

• Private Equity Is Ruining a Beloved Fly-Fishing Brand, Retailers Say

• John Paulson Gets a Gold Mine in America’s Critical Minerals Scramble

• The Cracks in Crumbl’s Cookie Empire Are Showing

• Donald and Melania Trump’s Terrible, Tacky, Seemingly Legal Memecoin Adventure

©2025 Bloomberg L.P.