X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Who says crime doesn’t pay? Just consider the case of Andrew Wiederhorn, a top executive at Fog Cutter Capital Group Inc. and a convicted felon. He’ll be making a cool $4.8 million while he serves an 18-month sentence. Fog Cutter’s board even voted to keep Wiederhorn on the payroll and tossed him an extra $2 million as a “leave of absence payment.” Wiederhorn went to federal prison on August 2, after pleading guilty to two felonies related to the collapse of Capital Consultants Inc., a Portland, Ore., investment manager that loaned him $160 million before he founded Fog Cutter in 1999. Shortly before Wiederhorn began serving his sentence, Fog Cutter, also a Portland investment firm, issued a press release titled “White Paper: The Whole Story About the Andrew Wiederhorn Matter.” It gave various reasons for keeping Wiederhorn on the payroll, including his importance to the company’s future success. It also said he had threatened to sue if the firm cut him loose, “based on his understanding of his rights under his employment agreement.” “The Whole Story” did leave out one key detail: According to Fog Cutter’s annual report, Wiederhorn owns about 65 percent of the company’s stock. Wiederhorn’s deal “is extremely unusual, to the point of being unheard of,” says Sanjai Bhagat, a professor of finance and corporate governance expert at the Lees School of Business of the University of Colorado. “I find it very disconcerting.” Compensation expert David Yermack says that it’s not illegal to contract a convicted felon to serve as an officer of a company. Yermack, a professor at New York University’s Stern School of Business, adds that “it would be hard for this to happen if [Wiederhorn] didn’t have a lock on the board.” He says the larger question is “whether it’s a move the market would welcome.” In Fog Cutter’s case, the market reaction hasn’t been warm. Wiederhorn’s prison pay has already prompted a shareholder lawsuit and may be responsible for a July 20 decision by Nasdaq to delist the company, a move Fog Cutter has appealed. The exchange, which has wide discretion to banish listed companies, notified Fog Cutter that it based its decision in part on a rule that allows delisting if the exchange “deems it necessary to prevent fraudulent and manipulative acts.” Wiederhorn pleaded guilty on June 3 to filing a false tax return and paying an illegal gratuity to the former CEO of Capital Consultants Inc. (CCI), which loaned $160 million to Wilshire Credit Corporation, one of his companies at the time. Prosecutors contend that Wiederhorn took the loan fully aware of the potential for breaking the law. But the case against him suffered from the loss of its star witness, Jeffrey Grayson, CCI’s former chief executive, who suffered a stroke in May 2002 and has been unable to testify. But in public statements and interviews, Wiederhorn — and Fog Cutter — insist his case is different from that of other corporate officers mired in scandal, because he lacked criminal intent and relied on the advice of attorneys and accountants to make decisions that ultimately resulted in his convictions. Wiederhorn, 38, first made a name for himself in the early 1990s with lucrative investments in the secondary mortgage loan market. In 1997 he won Portland’s “Entrepreneur of the Year” award. A year later, however, a global money crisis forced Wiederhorn to seek loans to keep the company in business. Wiederhorn turned for help to Grayson and CCI, a seemingly solid company. As it turned out, according to prosecutors, CCI was being kept illegally afloat in a huge Ponzi scheme that resulted in criminal convictions against its top officers. Wiederhorn has stated that he became collateral damage when the CCI loan pulled him into a federal probe of Grayson. Wiederhorn’s board is standing by their former CEO, and apparently looking forward to his return. According to a quarterly 10-Q filing with the Securities and Exchange Commission, he will get $2.8 million in salary and bonus while he’s in prison, plus the $2 million “leave of absence payment,” which happens to match the sum Wiederhorn has agreed to pay in restitution to victims of the CCI scam. The board also appointed Wiederhorn’s father-in-law, Donald Berchtold, as co-CEO, to help out while Wiederhorn serves his time. After the public outcry over its initial decision to keep Wiederhorn at the helm while in prison, the board demoted him to chief strategic officer in August. “The board determined that during the leave of absence period, Mr. Wiederhorn would be in a better position to develop strategies that would be of future benefit to the company, while his current status would significantly limit his ability to perform the full functions of co-chief executive officer,” the company stated. Yermack says it’s not uncommon for a board to circle the wagons around a chief executive in trouble. But, he adds, “it’s rare for the drama to be prolonged after the gates of the prison have slammed shut.”

This content has been archived. It is available exclusively through our partner LexisNexis®.

To view this content, please continue to Lexis Advance®.

Not a Lexis Advance® Subscriber? Subscribe Now

Why am I seeing this?

LexisNexis® is now the exclusive third party online distributor of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® customers will be able to access and use ALM's content by subscribing to the LexisNexis® services via Lexis Advance®. This includes content from the National Law Journal®, The American Lawyer®, Law Technology News®, The New York Law Journal® and Corporate Counsel®, as well as ALM's other newspapers, directories, legal treatises, published and unpublished court opinions, and other sources of legal information.

ALM's content plays a significant role in your work and research, and now through this alliance LexisNexis® will bring you access to an even more comprehensive collection of legal content.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.