## Facts

- Fog Cutter Capital Group, Inc. was a publicly traded company listed on NASDAQ; its CEO and chairman, Andrew Wiederhorn, and his family controlled about 53% of the company’s stock.
- Federal prosecutors informed Wiederhorn in 2001 that he was a target of a grand jury investigation related to Capital Consultants, LLC.
- Wiederhorn’s employment contract provided substantial severance if terminated without cause; “cause” originally included conviction of any non-traffic crime.
- In 2003, the company amended the contract so a conviction for a crime unrelated to the company would not constitute cause.
- In June 2004, Wiederhorn pleaded guilty to two federal felonies (illegal gratuity and filing a false tax return), received an 18-month prison sentence, and was ordered to pay $2 million restitution.
- On the eve of the plea, the company executed a leave-of-absence agreement under which Wiederhorn retained his CEO/chairman titles and responsibilities and continued to receive $350,000 salary and other compensation during incarceration.
- The company agreed to pay Wiederhorn $2 million, knowing it would be used to satisfy his restitution obligation, and publicly disclosed the arrangement.
- NASD, applying its Marketplace Rule 4300 discretionary listing authority, delisted the company’s stock based on the continued relationship with a convicted CEO, the restitution payment, and related governance/contract actions.
- The SEC dismissed the company’s administrative challenge and left the delisting in place; the company petitioned for review in the D.C. Circuit.

## Issues

1. Whether the SEC acted arbitrarily, capriciously, or unlawfully under APA § 706(2)(A) in upholding NASD’s discretionary delisting under NASD Rule 4300.

## Decision

- The D.C. Circuit denied the petition for review and upheld the SEC’s order.
- The court held the SEC reasonably concluded that NASD’s discretionary delisting fit within Rule 4300 and the Exchange Act’s investor-protection and public-interest aims.
- The court agreed delisting could rest on events undermining public confidence even absent a proven securities-law violation.
- The court found the SEC addressed the company’s arguments (including claimed economic necessity) and provided a rational explanation connecting the facts to the delisting decision.

## Legal Principles

- A self-regulatory organization may delist securities under an SEC-approved rule granting broad discretion when, in its judgment, events make continued listing inadvisable or unwarranted to protect investors and maintain market confidence.
- Delisting may be based on forward-looking public-interest and market-integrity concerns, not solely on formal violations of law.
- On judicial review, the SEC’s affirmance of an SRO’s listing decision is sustained if the SEC considered relevant factors, reasonably interpreted the governing rules and statute, and articulated a rational basis; courts do not reweigh the evidence under APA arbitrary-and-capricious review.

## Conclusion

The court upheld the SEC’s affirmance of NASD’s delisting because the agency reasonably treated the CEO’s felony convictions, the company’s decision to keep him as nominal leader while incarcerated, and the restitution funding as events that could undermine investor confidence, and the SEC adequately explained why continued listing was not in the public interest.


Fog Cutter Capital Group, Inc. v. SEC, 474 F.3d 822 (D.C. Cir. 2007)