Fog Cutter Capital Group v. Securities and Exchange Commission

Andrew Wiederhorn was a founder, chief executive officer, and director of Fog Cutter Capital Group, Inc. (Fog Cutter) (plaintiff). Fog Cutter’s stock was listed on the NASDAQ market. In March 2001, federal prosecutors notified Wiederhorn that he was the target of an investigation regarding crimes unrelated to Fog Cutter. Wiederhorn’s employment agreement provided that if Wiederhorn were terminated for cause, he would be entitled to his base salary through his termination date plus the payment of certain expenses, but that if he were terminated without cause, he would be entitled to three times his annual salary, three times his largest annual bonus from the prior three years, and the payment of certain expenses and other compensation. Wiederhorn’s contract defined cause to include Wiederhorn’s conviction for any crime other than a traffic offense. However, in 2003, the parties amended Wiederhorn’s contract to make Wiederhorn’s conviction for a crime unrelated to Fog Cutter an insufficient basis to terminate Wiederhorn for cause. On June 3, 2004, Wiederhorn entered into a plea agreement, which resulted in him being sentenced to 18 months’ imprisonment and being ordered to pay $2 million in restitution. The day before the plea, Fog Cutter and Wiederhorn entered into a leave-of-absence agreement that acknowledged his plea and provided that while in jail, Wiederhorn would retain his title and responsibilities and would be paid his $350,000 annual salary plus other compensation. Fog Cutter also agreed to pay Wiederhorn $2 million, which it knew he would use to make restitution. Fog Cutter publicly disclosed this arrangement. The National Association of Securities Dealers (NASD), which owned NASDAQ, delisted Fog Cutter’s stock after determining that Fog Cutter’s actions made it contrary to the public interest to continue to list Fog Cutter’s stock. Fog Cutter appealed to the Securities and Exchange Commission (SEC) (defendant), which oversaw the NASD. The SEC denied Fog Cutter’s appeal. Fog Cutter then filed a petition for judicial review, arguing that it should not have been punished because it did not violate the law and had little choice but to enter into the leave-of-absence agreement because it would have owed Wiederhorn approximately $6 million if it fired him without cause due to his non-Fog Cutter-related conviction.