FAT Brands Inc. (NASDAQ: FAT), the parent company of Fatburger, is facing legal challenges after being indicted by the U.S. Department of Justice (DOJ) on May 10, 2024, for alleged violations of the Sarbanes-Oxley Act. The charges relate to unauthorized credit extensions made to its former CEO, Andrew Wiederhorn.
According to the indictment, FAT Brands, through its subsidiary Fatburger North America, provided a personal loan of approximately $600,000 to Mr. Wiederhorn on January 30, 2019. Additionally, in 2020, the company is accused of lending about $2 million to its former parent company, Fog Cutter Capital Group Inc., which in turn, indirectly funded a personal loan to Mr. Wiederhorn.
The DOJ's indictment also includes charges against Mr. Wiederhorn, former CFO Rebecca Hershinger, and former tax advisor William Amon for various federal tax and other law violations linked to the loans.
Simultaneously, the U.S. Securities and Exchange Commission (SEC) has filed a complaint against FAT Brands, claiming multiple violations of securities laws. The SEC alleges that from 2017 to 2020, FAT Brands failed to disclose certain related party transactions, the salaries of Mr. Wiederhorn's adult children employed by the company, and maintained inadequate accounting controls.
The company is also accused of making false statements about its liquidity and the use of proceeds from certain transactions, including the credit extended to Mr. Wiederhorn.
The SEC complaint names additional defendants, including Mr. Wiederhorn, Ms. Hershinger, and the company's SVP of Finance, Ron Roe. The regulatory body is seeking injunctive relief, disgorgement of ill-gotten gains, and civil monetary penalties.
FAT Brands has acknowledged the charges and is currently assessing them, stating its intention to vigorously defend against the allegations. The company has indicated that the descriptions provided are summaries and has referred to the complete copies of the DOJ indictment and SEC complaint for full details, which are publicly available.
The information for this article is based on a recent SEC filing.
InvestingPro Insights
As FAT Brands Inc. (NASDAQ: FAT) navigates through its legal tribulations, the company's financial health is under the microscope of investors and analysts alike. A glimpse into the company's real-time financial data from InvestingPro reveals a mixed picture. Despite a commendable revenue growth of 26.77% over the last twelve months as of Q1 2024, FAT Brands is grappling with a significant debt burden, reflected in its negative P/E Ratio of -0.92 and an adjusted P/E Ratio of -0.76 for the same period. This suggests that the company's earnings are not covering its share price, which can be a red flag for potential investors.
One of the InvestingPro Tips for FAT Brands indicates that the stock is currently in oversold territory, with an RSI (Relative Strength Index) suggesting that the stock may be undervalued. This could potentially signal a buying opportunity for contrarian investors who believe the company will recover from its current challenges. Moreover, the company's dividend yield stands at an attractive 10.33%, a testament to its commitment to returning value to shareholders, having raised its dividend for 3 consecutive years.
However, it's worth noting that the stock has experienced a sharp decline over the last week, with a price total return of -27.15%, and has fared poorly over the last month and three months, with returns of -23.98% and -39.51%, respectively. Trading at a price significantly below its 52-week high, the stock might be appealing to value investors, but the volatility and recent performance will likely be a cause for concern.
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