Unlike many inmates in federal prison, Andrew Wiederhorn won't have to worry
about finding a job when he's released. In fact, the CEO of Fog Cutter Capital
Group will be making $2.5 million while he sits in a cell serving his 18-month
The board of directors of his company voted to keep Wiederhorn on the payroll
and even make him eligible for a bonus after he pleaded guilty to a pair of
felonies in the financial collapse of another company that loaned him $160
The Fog Cutter deal is nearly unprecedented in the post-Enron era of
corporate scandal, when domestic diva Martha Stewart voluntarily resigned her
top post after she was indicted in a stock trading scandal, and most top Enron
executives quit or were fired after the giant energy company declared
"It's incredibly unusual," said Mark DeFond, a University of Southern
California business professor. "These issues of management integrity have always
been important and have never been more important than now."
As Wiederhorn prepares to report to federal prison Monday, Fog Cutter has
been warned it could be delisted from the Nasdaq Stock Exchange and its auditors
But Wiederhorn still insists that his case is different from Enron or Stewart
because he relied on the professional advice of attorneys and accountants to
make decisions that ultimately resulted in his convictions.
Unlike Stewart, convicted of lying to federal investigators, and Enron
founder Kenneth Lay, accused of fraud and conspiracy, Wiederhorn argues he was
guilty only of technical violations without the criminal intent required of
"The government assured us from the beginning that they were trying to
determine whether or not there was intent," Wiederhorn said. "And if there was
no intent, and I sincerely relied upon counsel and accountants and all kinds of
advisers who were professionals, then that was it, they would walk away."
About a year ago, Wiederhorn said, after being under investigation for nearly
four years, he and his attorneys felt "there was a changing of the tides."
"They were looking to see if they could make a case stick," Wiederhorn said.
"I don't know if that's a sign of the times, from the environment we're in, and
all the other unrelated but dramatic corporate scandals."
Lance Caldwell, the assistant U.S. attorney who prosecuted Wiederhorn, said
the case was complicated and suffered from the loss of its star witness, Jeffrey
Grayson, the founder and former CEO of Capital Consultants, the company that
loaned Wiederhorn $160 million before Capital Consultants collapsed in September
2000 and was seized by federal regulators.
Grayson suffered a debilitating stroke in May 2002 and has been unable to
Caldwell said Wiederhorn's reliance on attorneys and accountants also was a
factor in reaching a plea agreement.
But the Fog Cutter decision to pay Wiederhorn while he is in prison and
provide $2 million in restitution on his behalf came as a complete surprise to
prosecutors the morning after the plea was entered.
"We had no hint that Fog Cutter intended to retain Wiederhorn or reimburse
him," Caldwell said.
Wiederhorn, 38, earned a reputation as a financial wunderkind in the early
1990s as he turned investments in the secondary mortgage loan market into a
public company by 1997. By the end of that year, he had become one of the five
highest-paid chief executives in Oregon, joining the ranks of top executives of
established companies such as Louisiana-Pacific, Tektronix, Mentor Graphics and
Sequent Computer Systems.
His success financed a high-flying lifestyle that included the usual corporate accouterments - a private jet, mansion, vacation home, expensive cars.
But within a year, in 1998, financial problems in Eastern Europe and Asia
triggered an international monetary crisis that utlimately forced Wiederhorn to
seek loans to shore up a company that had become dangerously overextended.
Wiederhorn said nobody saw the crisis coming, and financial analysts,
accountants, attorneys and prosecutors all agreed with him on that point in
interviews about his former company, the Wilshire Financial Services Group.
When he turned to Grayson and Capital Consultants for help, Wiederhorn said
he was relying on another company that had built a solid reputation but also was
The difference, Wiederhorn said, is that he was trying to rebuild his company
while unknown to anybody, Capital Consultants was being kept afloat illegally in
what prosecutors later called a giant pyramid scheme that resulted in criminal
convictions against top executives.
Wiederhorn said he became collateral damage when the $160 million loan from
Capital Consultants pulled him into the federal investigation of Grayson.
He was forced to hire defense attorneys who ended up battling with his
business attorneys over their advice to him on handling the loan and his taxes.
Lanny Davis, former special counsel to President Clinton, led a team that
eventually negotiated the plea deal that will send Wiederhorn to federal prison
despite what Davis has repeatedly insisted - in interviews and in newspaper
editorials - is a case of overzealous prosecution.
"I'm not impugning the integrity or the sincerity of the prosecutors - they
made valid, good-faith judgments and I'm not questioning them," Davis said.
"But the most important observation I can make is that we're in an age where
accusation and even innuendo, which is less than accusation, becomes a surrogate
for guilt," he said.
Davis noted that Wiederhorn has taken personal responsibility for the losses
suffered by the Capital Consultants pension funds that loaned him money, and
that the pension funds were eventually reimbursed for much of it.
He also emphasized that the plea deal involved Wiederhorn's old company, and
Fog Cutter is not involved in any way with Wilshire or the investigation that
led to the conviction.
But regret and even reimbursement still do not change the effect of a guilty
plea to a federal felony, said David Ruder, former chairman of the U.S.
Securities and Exchange Commission and now a Northwestern University law
"This reminds me very much of Michael Milken and attempts to alleviate his
guilt," Ruder said, referring to the former junk bond king of Wall Street who
went to prison for two years after pleading guilty to fraud and conspiracy
Ruder said Milken avoided other potential convictions with a plea agreement,
and then worked to rehabilitate his image, but the fact remained that he had
Wederhorn will have to live with his conviction no matter whether he returns
to his new company when he is released from prison, Ruder said.
"Eighteen months is a tremendous penalty for a person like that, just as five
months for Martha Stewart is tremendous," Ruder said. "For white-collar crime,
any jail time is extremely significant."
Caldwell said he could not comment on the specifics of the Wiederhorn case.
But, in general, he noted that cases such as Enron and Martha Stewart accompany
an economic downturn.
"Financial or corporate fraud often follows a period of excess or a bubble in
valuations of stock, bond or real estate assets," Caldwell said. "When everyone
is making money, fraud or corruption is obscured. But when the bubble bursts,
these things are revealed."
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