United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 20, 2006 Decided January 23, 2007

No. 06-1071

FOG CUTTER CAPITAL GROUP INC.,

PETITIONER

v.

SECURITIES AND EXCHANGE COMMISSION,

RESPONDENT

On Petition for Review of an Order of the

Securities and Exchange Commission

Meredith Moss argued the cause for petitioner. With her on

the briefs were Lanny J. Davis and James A. Meyers.

Dominick V. Freda, Senior Counsel, Securities & Exchange

Commission, argued the cause for respondent. With him on the

brief were Brian G. Cartwright, General Counsel, Andrew N.

Vollmer, Deputy General Counsel, Jacob H. Stillman, Solicitor,

and Randall W. Quinn, Assistant General Counsel. Eric

Summergrad, Deputy Solicitor, entered an appearance.

Before: GINSBURG, Chief Judge, and RANDOLPH and

ROGERS, Circuit Judges.

Opinion for the Court filed by Circuit Judge RANDOLPH.
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RANDOLPH, Circuit Judge: The National Association of

Securities Dealers (NASD) delisted Fog Cutter Capital Group’s

public stock from Nasdaq. The Securities and Exchange

Commission dismissed Fog Cutter’s petition for review. In re

Fog Cutter Capital Group, Inc., Exchange Act Release No. 34-

5,2993, 2005 WL 3500274, at *4 (Dec. 21, 2005). The issue in

this petition for judicial review is whether the Commission’s

dismissal was “arbitrary, capricious, an abuse of discretion, or

otherwise not in accordance with law,” 5 U.S.C. § 706(2)(A).

The NASD is a registered “national securities association”

under the Securities Exchange Act of 1934, 15 U.S.C. § 78o3(b). At all times relevant to this case, the NASD operated

Nasdaq, an electronic securities exchange. As a self-regulatory

organization, the NASD must maintain rules to protect investors

and the public interest. 15 U.S.C. § 78o-3(b)(6). One of these

rules, approved by the Commission, stated that the NASD “will

exercise broad discretionary authority over the initial and

continued inclusion of securities in Nasdaq in order to maintain

the quality and public confidence in its market.” See NASD

Marketplace Rule 4300. To that end, the NASD will delist

securities if, in its “opinion,” events occur that render it

“inadvisable or unwarranted” to continue listing the securities

“even though the securities meet all enumerated criteria for”

listing. Id.

For Fog Cutter, the disqualifying events centered on the

criminal investigation, indictment, and conviction of its Chief

Executive Officer and Board Chairman, Andrew Wiederhorn,

and the manner in which the company dealt with this

development. Wiederhorn founded Fog Cutter in 1997 and, with

family members, controlled approximately fifty-three percent of

the company’s stock. The company operated a national

restaurant chain and engaged in banking, financing, and real

estate investment activities.
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In March 2001, federal prosecutors informed Wiederhorn

and Lawrence Mendelsohn, a former president of Fog Cutter,

that they were targets of a grand jury investigation into the

collapse of Capital Consultants, LLC, an investment adviser for

union pension plans. Other than the fact that Wiederhorn and

Mendelsohn were investigated for actions unrelated to Fog

Cutter, the details of the criminal case are unnecessary to

recount. Mendelsohn pleaded guilty and agreed to cooperate

with the government. Wiederhorn later entered into a plea

agreement and pleaded guilty to a two-count indictment

charging him with giving an illegal gratuity and filing a false tax

return, both felonies. The district court sentenced him to

eighteen months in prison and ordered him to pay a $25,000 fine

and $2 million to the Capital Consultants receiver.

On June 2, 2004, the day before Wiederhorn entered into

the plea deal, he finalized a leave-of-absence agreement with

Fog Cutter. The agreement acknowledged Wiederhorn’s plea

agreement and imminent incarceration, and provided that during

his absence he would retain his titles and responsibilities. Fog

Cutter agreed to pay Wiederhorn his $350,000 annual salary,

bonuses, and other benefits while he was imprisoned. The

company also agreed to pay him a $2 million “leave of absence

payment” to retain his “good will, cooperation and continuing

assistance, and in recognition of Wiederhorn’s past service to

the Company, to help avoid litigation and for . . . other reasons.”

Fog Cutter knew Wiederhorn would use the $2 million payment

to pay the restitution his plea agreement ordered. In its filings

with the Commission, Fog Cutter disclosed this information and

the $4.75 million cost of its agreement with Wiederhorn.

In July 2004, NASD staff decided that it was contrary to the

public interest for Fog Cutter to remain listed on Nasdaq with

Wiederhorn exercising substantial influence over the company
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while incarcerated. See In re Fog Cutter, 2005 WL 3500274, at

*3. An NASD Panel determined that the Board’s willingness to

amend Wiederhorn’s employment agreement, acquiescence to

Wiederhorn’s demands for financial support during his

imprisonment, payment of his court-ordered restitution, and

retention of him in his executive and director positions during

his imprisonment were contrary to the public interest. The

NASD Listing and Hearing Review Council affirmed the

Panel’s decision “in order to protect the quality of and public

confidence in The Nasdaq Stock Market, and to protect investors

and the public interest.” See id. Fog Cutter applied to the

Securities and Exchange Commission for review of the

Council’s decision. The Commission dismissed the application

for review, focusing, as had NASD, on Wiederhorn’s status as

a convicted felon and the Board’s actions supporting and

retaining Wiederhorn on the Board and in management.

Fog Cutter’s main complaint is that the Commission failed

to take into account the company’s sound business reasons for

acting as it did. The decision to enter into the leave-of-absence

agreement was, Fog Cutter argues, in the best interest of its

shareholders. The company tells us that Wiederhorn’s

continuing commitment to the company and his return to an

active role in the company after his incarceration were essential

to preserving Fog Cutter’s core business units.

The company focuses on its 2002 purchase of a majority

interest in George Elkins Mortgage Banking Co., Inc. (GEMB).

The Stock Purchase Agreement conditioned Fog Cutter’s

majority interest in GEMB upon Wiederhorn’s serving as either

a member of the Board or as CEO of Fog Cutter. If he occupied

neither position, the minority shareholders had an option to

repurchase their interest in GEMB, unless Wiederhorn’s absence

was due to his death or disability. Fog Cutter claims such a
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repurchase would be at “fire sale” prices, and that keeping

Wiederhorn on board was therefore essential.

The company has presented nothing to support the

likelihood that the options would be exercised. Nor has the

company ever specified how much it would have lost from the

exercise of the options. All we have is Fog Cutter’s obscure

assertion, without any citation to the record, that GEMB was

“potentially valued at up to $10 million.” See Opening Br. of

Pet’r 22. Even if we put aside the “potentially,” we are still left

with no information about the difference between the option

price and the fair market value – or potential value – of Fog

Cutter’s GEMB stock. What we do know is that Fog Cutter

made a deal with Wiederhorn that cost the company

$4.75 million in a year in which it reported a $3.93 million net

loss. We know as well that Fog Cutter handed Wiederhorn a

$2 million bonus right before he went off to prison, a bonus

stemming directly from the consequences of Wiederhorn’s

criminal activity. 

Under Section 19(f) of the Exchange Act, 15 U.S.C.

§ 78s(f), the Commission must dismiss an application for review

of an NASD delisting order if (1) the “specific grounds” “exist

in fact,” (2) the decision was in accordance with NASD rules,

(3) the rules are and were applied in a manner consistent with

the Exchange Act, and (4) the decision imposes no unnecessary

or inappropriate burden on competition under the Act. Whether

the Commission acted arbitrarily, capriciously, or unlawfully

depends on whether its review of the NASD’s decision complied

with Section 19(f). 

Here there was ample evidence supporting the NASD’s

grounds for taking action against Fog Cutter: Wiederhorn’s

guilty plea, the leave of absence deal and its cost to the

company, the Board’s determination that Wiederhorn should
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retain his positions with Fog Cutter, and the concern that

Wiederhorn would continue to exert influence on company

affairs even while he was in prison. The decision was in

accordance with NASD rules giving the organization broad

discretion to determine whether the public interest requires

delisting securities in light of events at a company. That rule is

obviously consistent with the Exchange Act, and NASD’s

decision did not burden competition.

Fog Cutter claims that it had to pay Wiederhorn and retain

him because if it fired him in light of his guilty plea, it would

have owed him $6 million. This scarcely speaks well for the

company’s case. The potential obligation is a result of an

amendment the Board granted Wiederhorn in 2003 while he was

under investigation. Wiederhorn’s employment agreement

stated that if terminated “for cause,” he was entitled only to his

base salary through the date of termination and payment of

unreimbursed business expenses. If it terminated Wiederhorn

without cause, Fog Cutter would have owed him three times his

annual salary, three times his largest annual bonus from the last

three years, unreimbursed business expenses, and accrued but

unpaid base salary and bonuses – which Fog Cutter estimates

would amount to $6 million – all as a lump-sum payment within

ten days. Before the amendment to Wiederhorn’s employment

agreement in 2003, termination “for cause” included the

conviction of any felony other than a traffic offense. In the 2003

amendment, the relevant provision allowed the Board to

terminate Wiederhorn “for cause” upon conviction of a felony

involving Fog Cutter. The Board had known about the

investigation of Wiederhorn in connection with Capital

Consultants for more than two years when it agreed to this

amendment.

Fog Cutter thinks NASD’s action was “unfair.” But it was

the company that bowed to Wiederhorn’s demand for an
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amendment to his employment agreement, knowing full well

that it was dramatically increasing the cost of firing him. Now

it argues that terminating Wiederhorn would have been too

expensive. One is reminded of the old saw about the child who

murders his parents and then asks for mercy because he is an

orphan. The makeup of Fog Cutter’s Board was virtually

unchanged between the time it amended the employment

agreement and entered into the leave-of-absence agreement. In

re Fog Cutter, 2005 WL 3500274, at *2 n.6. It was, to say the

least, not arbitrary or capricious for the Commission to find that

Wiederhorn exercised thorough control over the Board, and to

find this troubling. We agree that the Board provided little or no

check on Wiederhorn’s conduct, and that the Board’s actions

only aggravated the concerns Wiederhorn’s conviction and

imprisonment raised.

That Fog Cutter did not itself violate the securities laws and

that it disclosed the relevant events does not demonstrate any

error in the delisting decision. The NASD’s rules state that it

may apply criteria more stringent than the minimum standards

for listing. See NASD Marketplace Rule 4300. Fog Cutter’s

disclosure of its arrangements with Wiederhorn did not change

the nature of those arrangements, which is what led the NASD

to find that the company’s actions were contrary to the public

interest and a threat to public confidence in the Nasdaq

exchange.

Fog Cutter points to the continued listing of two companies

– Steve Madden and Martha Stewart Living Omnimedia – in

spite of the fact that Steve Madden and Martha Stewart, the

chief executives of the companies, were convicted and

imprisoned. This amounts to a selective prosecution argument,

and it goes nowhere. To prove selective prosecution, a claimant

must be part of a protected class under the Equal Protection

Clause, U.S. CONST. amend. XIV, § 1, and show not only that
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prosecutors acted with bad intent, but also that “similarly

situated individuals [outside the protected category] were not

prosecuted.” United States v. Armstrong, 517 U.S. 456, 465

(1996). Fog Cutter clearly cannot prove all, if any, of these

factors. As the Commission points out, Martha Stewart Living

Omnimedia is listed on the New York Stock Exchange, not

Nasdaq. And it is the NASD, not the Commission, that

institutes the delisting investigations and renders delisting

decisions. The Commission’s role is as a reviewing body, not

an initiator.

In delisting Fog Cutter, the NASD was concerned with the

integrity and the public’s perception of the Nasdaq exchange in

light of both Wiederhorn’s legal troubles and the Board’s

ongoing acquiescence to his demands. The Commission amply

supported these concerns and was well within its authority to

dismiss Fog Cutter’s application for review of the NASD’s

delisting decision. We therefore deny Fog Cutter’s petition for

judicial review.

So ordered.