Saturday, April 2, 2005
I wasn't sure what category to give to this entry, and somehow "fraud" seemed to fit the bill, although when you disclose everything you're doing that usually vitiates any deception. The annual 10-K filing for Fog Cutter Capital Group Inc. (here), a publicly-traded REIT (whose shares were delisted by NASDAQ last year), disclosed that the company paid it former CEO and board member, Andrew Wiederhorn, a little more than $6.6 million last year -- not bad, but certainly nothing abnormal in the world of CEO compensation. What makes things interesting is Wiederhorn is currently serving an 18-month term of imprisonment in an FCI after pleading guilty to two counts in June 2004. Here is the company's description of the guilty plea and a subsequent leave of absence agreement it reached with Wiederhorn:
Under the Settlement terms, Mr. Wiederhorn pled guilty on June 3, 2004 to two federal counts and was sentenced to 18 months incarceration and fined $2.0 million. The first count, a violation of an ERISA provision, involved a federal law that required no criminal intent and for which his reliance on the advice of counsel was not a defense. The second count related to a violation involving a deduction on a personal tax return. The deduction was structured and approved by Mr. Wiederhorn’s tax advisors and did not reduce Mr. Wiederhorn’s tax liability or reduce the government’s tax collections. The charges to which Mr. Wiederhorn has pled guilty pursuant to the Settlement are not based upon any acts or omission involving the Company or Mr. Wiederhorn in his capacity as an officer or director of the Company.
In entering into Mr. Wiederhorn’s leave of absence agreement, the Company’s Board of Directors considered the nature of the statutes to which Mr. Wiederhorn pled and the fact that he relied on the advice of expert legal counsel and a national accounting firm. The Board also believed it was important to assure Mr. Wiederhorn’s return to active involvement with the Company because of his expertise and knowledge and to preserve a significant business relationship and the value of the Company’s investments.
Under the terms of the leave of absence agreement, Mr. Wiederhorn will continue to receive his regular salary and bonus pursuant to and as set forth in his employment agreement. In addition, in consideration of Mr. Wiederhorn’s good will, cooperation, and continuing assistance, and in recognition of Mr. Wiederhorn’s past service to the Company, to help avoid litigation and for the other reasons stated in the agreement, the Company made a leave of absence payment to Mr. Wiederhorn in the amount of $2.0 million on June 2, 2004.
Interesting that the leave of absence payment is exactly the same as the criminal fine, and they made the agreement the day he entered his guilty plea. But wait, it gets better. Wiederhorn's position was changed from CEO to "Chief Strategic Officer" because "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." Funny how a prison sentence would "significantly limit his ability" to serve as CEO, but allow one to "develop strategies" for the company -- then again, maybe I'm too cynical.
Don't worry about Wiederhorn being salary-deprived while in prison, however, because the 10-K notes in the compensation section that his 2004 salary was $556,830, his bonus was $5,508,329, and restricted stock award was $544,025. He began his term of imprisonment on Aug. 2, 2004, so this presumably includes work since becoming Chief Strategic Officer while also a federal prisoner. To be fair, the company's disclosure points out that $1.5 million of the bonus was escrowed pursuant to the leave of absence agreement, so he won't get that money until after the conclusion of the leave, I presume. Thus, his actual compensation in 2004 was only about $5.1 million, plus having the company take care of that criminal fine. Last, and certainly not least, the company said it will likely have to cover the costs of his attorneys under an indemnification agreement. Needless to say, there also has been a shareholder derivative suit filed regarding the leave of absence agreement.
Wiederhorn is scheduled to get out of prison in November 2005 (projected release date), and likely will resume his role as CEO of Fog Cutter. People expressed dismay when the value of Martha Stewart's stock increased threefold while she was in prison, but she did not receive her salary while there, nor a bonus, and could not control how the market chose to value her company. This one seems to be quite a bit different, with the company still effectively in Wiederhorn's hands (his father-in-law is the CEO in his absence) awaiting his return from prison.
Thanks to Peter Goldberger for the tip (noting that it could almost qualify as an April Fools Day story), and a story about Wiederhorn's compensation is available from The Oregonian here, and if you check the article his actual prison register number is 67914-065 at the FCI in Sheridan, OR.(ph)