Fog Cutter Capital Group, Inc. V. Securities and Exchange Commission

Case name: Fog Cutter Capital Group, Inc. v. Securities and Exchange Commission (Chapter 5, Pages 104-106)

Court Delivering Opinion: United States Court of Appeals, District of Columbia Circuit, 2007.

Citation: 474 F.3d 822.

Facts: Fog Cutter Capital Group, Inc. was founded by Andrew Wiederhorn in 1997 to manage a restaurant chain and mortgage bank in addition to real estate and investment businesses. Along with family members, Wiederhorn controlled more than 50 percent of Fog Cutters stock, making him the chairman, chief executive officer, and controlling stockholder of the company. In 2001, Wiederhorn became the target of an investigation regarding the collapse of Capital Consultants, LLC. In June 2004, Andrew Wiederhorn plead guilty to paying an illegal gratuity and filing a false tax return, serve eighteen months in prison, pay a $25,000 fine, and pay $2 million to Capital Consultants. In 2003, Fog Cutter approved Wiederhorn’s amendment to his employment agreement while he was under investigation. The amendment altered the previous employment agreement from termination “for cause”, previously defined as the conviction of a felony not involving a traffic offense to the conviction of a felony not involving a traffic offense involving Fog Cutter. [Emphasis added] Furthermore, Fog Cutter agreed to a two million dollar “leave of absence payment” one day prior to Wiederhorn’s guilty plea. Following the felony conviction of the chief executive officer and other actions of Fog Cutter highlighted in an investigation by the National Association of Securities Dealers (NASD), which operates the Nasdaq, Fog cutter was delisted from the Nasdaq. Fog Cutter appealed the decision to the Securities and Exchange Commission (SEC), which dismissed the appeal. Fog Cutter then petitioned the U.S. Court of Appeals for the District of Columbia Circuit for review.

Issue: Did the Securities and Exchange Commission fail to take into account the sounds business reasons for Fog Cutter’s decision to enter into leave-of-absence agreement with Andrew Wiederhorn?

Decision: No. The U.S. Court of Appeals for the District of Columbia Circuit denied Fog Cutter’s petition for review of the SEC’s decision. The court followed the reasoning of both the NASD and the SEC in that the legal troubles of Andrew Wiederhorn and the response to his demands by Fog Cutter were a concern to the integrity and public perception of the Nasdaq exchange. Furthermore the court found that the decisions of NASD and the SEC followed the authorities granted to them respectively.

Reason: The decision of the NASD to delist Fog Cutter was in strict accordance with NASD rules giving the organization a broad discretion to determine whether or not the actions of a company affect the public