A significant shareholder of FAT Brands Inc., the parent company of popular restaurant chains like Fatburger and Johnny Rockets, has filed a lawsuit alleging the company deliberately concealed the true scale of its debt. This comes as the firm's financial outlook darkens, with its stock price plunging to a multi-year low.
Allegations of Hidden Debt and Financial Misrepresentation
The legal complaints, filed in Delaware Chancery Court since late November, accuse FAT Brands of a serious financial cover-up. The shareholder claims the company resorted to high-interest merchant cash advances (MCAs) as its finances worsened. These MCAs, along with other complex transactions, were allegedly used to artificially inflate the company's cash position and mask severe liquidity problems.
According to the lawsuit, these troubling details were not properly disclosed to investors or reflected in the company's public financial statements. The core allegation is that FAT Brands misrepresented debt as cash in an attempt to secure new financing.
The financial strain became public in late November when FAT Brands warned it could be forced into bankruptcy. This warning came after creditors demanded full repayment on approximately $1.2 billion of whole-business securitization debt, an amount the company admitted it did not have "on hand to pay."
Details of the Lawsuit and High-Interest Borrowing
The shareholder, Kevin Gordon, alleges FAT Brands' total debt exceeds $1.4 billion and that the company is unlikely to repay its lenders. Gordon began investigating after a "failed transaction" between FAT Brands and Alagna Advisors, where he serves as global head of structured credit.
The court documents reveal that around March or April of this year, FAT Brands turned to merchant cash advances, borrowing up to $15 million with effective interest rates as high as 45%. This move is described as a "binge of reckless, high-interest, short-term corporate borrowing."
Furthermore, the lawsuit details a series of bond sales to firms like Axonic Capital and Barclays Plc. These deals included a put option requiring FAT Brands to buy back the bonds at a higher price. When buyers exercised this option, FAT Brands defaulted. The lawsuit claims the company treated these as ordinary cash sales to mislead the market about its true liquidity crisis.
Executive Scrutiny and Wider Fallout
The legal filing also points to controversial related-party transactions. It alleges that FAT Brands' spinoff, Twin Peaks Hospitality Group, authorized about $2.2 million in cash bonuses to management and restricted stock units to CEO Andy Wiederhorn and his sons, who are board members and executives. The shareholder argues these funds should have been used to repay debt.
This is not the first legal trouble for Wiederhorn. He was indicted last year by the U.S. Justice Department for allegedly helping to conceal $47 million in payments as shareholder loans, though the case was dropped earlier this year. He also just settled a separate investor lawsuit for $10 million over similar claims.
The financial turmoil at FAT Brands raises red flags for its debt holders, which include entities like 352 Capital, a hedge fund backed by Leucadia Asset Management (part of Jefferies Financial Group). The situation adds to the scrutiny around Leucadia, which also faced exposure through the collapse of auto parts supplier First Brands Group.
FAT Brands' shares hit a more than five-year low this week and have fallen roughly 85% year-to-date. The company has until next week to formally respond to the lawsuit. Representatives for FAT Brands, Barclays, and Jefferies have declined to comment on the ongoing legal matter.
