Wiederhorn founded Fog Cutter Capital after the collapse of Wilshire Credit following questionable investments involving union retirement funds. However, US law enforcement continued a criminal investigation into Wiederhorn's activities while at Wilshire Credit, which was ended when Wiederhorn pleaded guilty to filing a false tax return and paying Jeffrey Grayson, the head of Capital Consultants, an "illegal gratuity" in return for a prison sentence and payment of $4.6 million in fines. Wiederhorn served 16 months in federal prison between 2005 and 2006. In April 2013, while conducting a CBS "Undercover Boss" press interview, Wiederhorn attributed his jail sentence to bad legal advice he had received on a business deal, which led to the violation of the pension fund law, ERISA.