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At least he can’t blow it all at the track. An Oregon investment firm is paying former CEO Andrew Wiederhorn $4.8 million while he serves an 18-month jail sentence for felony fraud. The directors of Fog Cutter Capital Group Inc. even voted to keep Wiederhorn on the payroll as “chief strategic officer.” Wiederhorn went to prison in August, after pleading guilty to two federal felonies related to the collapse of Capital Consultants Inc., a Portland, Oregon, investment manager that loaned him $160 million before he founded Fog Cutter in 1999. Shortly before Wiederhorn began serving his sentence, Fog Cutter, also based in Portland, issued a press release titled “White Paper: The Whole Story About the Andrew Wiederhorn Matter.” It gave various reasons for continuing to employ Wiederhorn, 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 minor 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 at 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 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.” In June Wiederhorn pled guilty to filing a false tax return, as well as to paying a kickback to Jeffrey Grayson, the former CEO of Capital Consultants. Grayson’s firm had loaned $160 million to Wilshire Credit Corporation, one of Wiederhorn’s companies at the time. Prosecutors contend that Wiederhorn took the loan fully knowing that he might be breaking the law. But the government’s case against Wiederhorn suffered after its star witness, Grayson, had a stroke in 2002 that left him unable to testify. In a series of statements and public interviews, Wiederhorn � and Fog Cutter � insists his case is different from that of other corporate officers mired in scandal, because he lacked criminal intent. He also maintains that he 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, the global money crisis forced him to seek loans to stay in business. Wiederhorn turned for help to Capital Consultants, a seemingly solid company. As it turned out, Capital Consultants was being kept afloat by an illegal Ponzi scheme, the government says. Prosecutors eventually won criminal convictions against Capital Consultants’ top officers, including Grayson ["Sour Charity," August]. Wiederhorn has stated that he became collateral damage when his Capital Consultants loan drew him into the 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 a $2 million “leave of absence payment,” which happens to match the exact sum Wiederhorn has agreed to pay in restitution to victims of the Capital Consultants 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 the convicted felon to chief strategic officer in August. 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.”

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