First Brands Alleged Multibillion-Dollar Fraud

First Brands Group’s new leadership filed a lawsuit against former CEO Patrick James on November 4, 2025, accusing him of orchestrating a multibillion-dollar fraud that left the auto parts company insolvent. The suit alleges James misappropriated hundreds of millions—if not billions—of dollars for personal enrichment, leading to First Brands’ bankruptcy and significant financial losses.

The bankruptcy filing of First Brands Group on September 28, 2025, represents more than another corporate insolvency. This Ohio-based auto parts manufacturer disclosed liabilities between $10 billion and $50 billion against assets of only $1 billion to $10 billion, catching sophisticated Wall Street firms completely off guard.

According to Bloomberg's reporting, the price of First Brands' loans plummeted 80% in a single day once the true extent of the company's obligations became clear.

Why should alternative lenders pay attention to the First Brands bankruptcy?

The collapse matters for three reasons.

1. First, it exposes systematic failures in how lenders assess off-balance sheet financing, particularly factoring and supply chain finance (SCF) programs.Global Trade Review reported that investigators are probing whether receivables were financed multiple times, with the company accruing $2.3 billion in factoring liabilities, $800 million in supply chain finance obligations, and approximately $6.1 billion in traditional debt.

2. Second, major institutional players took significant hits, with UBS O'Connor holding 30% exposure to First Brands (9.1% direct, 21.4% indirect through receivables) and Jefferies reporting $715 million in receivables exposure through its Leucadia Asset Management unit.

3. Third, the case reveals that current accounting standards contain a fatal loophole that allows companies to hide billions in borrowing.

The broader market reaction confirms this is not an isolated event. JPMorgan CEO Jamie Dimon warned on the bank's Q3 earnings call: "When you see one cockroach, there are probably more.

And so we should, everyone should be forewarned on this one." Jim Chanos, the investor famous for exposing Enron, drew direct parallels between First Brands and Enron, both of which relied heavily on off-balance sheet financing to mask their true leverage.

What specific red flags did sophisticated lenders miss?

The most experienced credit professionals overlooked multiple warning signs that should have triggered enhanced due diligence. According to Bloomberg's investigation, lenders were aware that First Brands' owner kept his camera off during Zoom calls, that his brother provided angry pushback when investors requested invoices to back up their loans, and that the company frequently made late payments to suppliers. Yet these behavioral red flags failed to prompt the level of scrutiny such indicators warranted.

The interest rate structure alone should have raised immediate concerns. First Brands paid approximately 30% on some of its short-term borrowing, a rate typically reserved for distressed companies. For a business supposedly dealing in dependable aftermarket parts like FRAM filters and Raybestos brakes, this cost of capital signaled fundamental solvency issues rather than operational success. The company's refinancing attempt in August 2025 stalled when potential lenders requested, but never received, a Quality of Earnings (QoE) report. Court documents show this failure to produce standard due diligence materials became the catalyst for the collapse.

The platform concentration risk was equally stark. Raistone Capital, which helped arrange much of First Brands' off-balance sheet financing, derived 70-80% of its revenue from First Brands alone. This extreme dependence on a single, highly leveraged client mirrored the 2021 Greensill Capital collapse that devastated Credit Suisse. UBS O'Connor's fund technically avoided breaching its 20% single-position limit by splitting indirect exposure across First Brands' various customers, an accounting maneuver that satisfied investment guidelines on paper while completely failing to capture the true concentration risk. When the borrower itself is the source of systemic risk, the diversity of end obligors becomes irrelevant.

How did accounting standards enable this level of opacity?

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2022-04 in September 2022, requiring companies to disclose supply chain finance programs in financial statement footnotes. These reforms took effect for fiscal years beginning after December 15, 2022, and were designed to enhance transparency around buyer use of supplier finance programs. However, as Deloitte's analysis explains, the standard contains a critical limitation: it does not require companies to reclassify trade payables financed through SCF programs as financial liabilities on their balance sheets.

This loophole allowed First Brands to present what was effectively short-term debt as operational payables, obscuring its true leverage from investors. The company held approximately $2.982 billion in combined factoring facilities ($2.3 billion) and Supply Chain Finance ($682 million) just before the collapse, in addition to $6.1 billion in traditional debt. Yet financial statements could present this massive off-balance sheet exposure in footnotes rather than as hard liabilities, making it difficult for lenders to calculate accurate leverage ratios or assess true liquidity risk.

The inadequacy of disclosure-only reform is now abundantly clear. Trade Finance Global's analysis notes that "disclosure requirements alone cannot ensure financial stability when companies, lenders, and intermediaries all benefit from opacity. Effective regulation requires not just disclosure mandates but meaningful enforcement and penalties for obfuscation." Court filings show that among First Brands' 30 largest non-insider creditors, the six highest claims were all SCF-related, reaching over $233 million. This concentration of off-balance sheet obligations among top creditors should have been visible to any lender conducting proper due diligence, yet the accounting treatment allowed it to remain hidden in plain sight.

What are the core allegations of fraud in this case?

Lenders to First Brands special purpose vehicles filed allegations on October 30, 2025, claiming "widespread fraud" and stating that new information indicates the business "made misrepresentations in numerous financial statements, credit agreements, and borrowing base certificates." The most damaging allegation involves double-pledging, where the same accounts receivable were allegedly turned over to multiple third-party factors. This practice allows a company to take on substantially more debt than would be possible if collateral rights were exclusive.

The "$2.3 billion vanishing act" became the catalytic disclosure that shattered creditor confidence. Raistone Capital claimed in court filings that $2.3 billion had "simply vanished," a claim the U.S. Trustee corroborated, noting that First Brands itself admitted it "can't find $2.3 billion related to off-balance sheet financing deals." This massive disappearance of funds triggered urgent calls for the appointment of an independent examiner and reportedly prompted a U.S. Department of Justice criminal investigation.

The inventory commingling allegations added another layer of complexity. Evolution Credit Partners, a provider of inventory finance, claimed that First Brands "fraudulently siphoned assets away" and that inventory pledged as exclusive security may have been "commingled" with collateral securing a separate asset-backed loan facility where Bank of America served as agent. Lenders discovered shortly before the bankruptcy filing that bank accounts meant to hold cash for special purpose vehicles "had no cash in them," and advisors did not know where the money had gone. These allegations of asset dissipation and fraud explain why the financial black hole exceeded even the most pessimistic estimates.

Which institutions are facing the largest losses?

UBS O'Connor's opportunistic working capital finance fund held approximately $500 million in exposure, split between 9.1% in direct payables and 21.4% in indirect receivables, with the fund's investment channeled through Raistone Capital. The 30% total exposure to a single borrower represents a concentration that institutional guidelines are specifically designed to prevent. The fund's technical compliance with its 20% single-position limit, achieved by splitting indirect exposure across First Brands' customers, demonstrates how guideline manipulation can create systemic risk while maintaining superficial compliance.

Jefferies Financial Group faced multiple exposure points. Point Bonita Capital, a fund managed by Jefferies' Leucadia Asset Management unit, held $715 million in receivables linked to First Brands. Additionally, CLOs managed by Jefferies Finance held $48 million in First Brands' term loans, though Jefferies clarified the current market value was approximately $17 million with direct economic exposure from the CLOs at only around $2 million. The firm also came under scrutiny for an alleged "side letter" that reportedly allowed First Brands to pay fees exceeding interest rate caps specified in its loan covenants. Jefferies CEO Rich Handler stated on October 17, 2025 that the bank believes it was "defrauded" by First Brands.

Other major creditors include Katsumi Global, which claimed it was owed over $1.7 billion, and a joint venture between Norinchukin Bank and Mitsui & Co., which stated its exposure was $1.75 billion through trade financing. Regional banks also took hits, with First Citizens Bancshares and South State calling out charge-offs of $82 million and $32.2 million respectively during analyst calls. JPMorgan, while having no exposure to First Brands, took a $170 million write-off related to Tricolor Holdings, another recent bankruptcy that Dimon grouped in the same category of overleveraged companies with opaque borrowing schemes.

How will trade credit insurance pricing respond to this event?

Morningstar DBRS published a research note on October 13, 2025, characterizing the First Brands collapse as "likely to become a real-world stress test for the trade credit ecosystem at the intersection of insured receivables and private credit." The rating agency's base case estimates total insured losses in the range of $300 million to $600 million, which should remain manageable for the sector as an earnings event without capital strain. However, in an adverse scenario, Morningstar DBRS anticipates "broader claims recognition, reserve strengthening, and total losses potentially exceeding $1 billion across trade credit insurers and reinsurers."

The immediate market response confirms that repricing is already underway. Morningstar DBRS expects "a general repricing of receivables associated with highly leveraged insureds and complex supply chain finance structures." This repricing will manifest through three mechanisms: accelerated premium increases, particularly for borrowers utilizing complex trade financing structures; reduced capacity for high-leverage clients, especially those relying on SCF or factoring for working capital stability rather than growth; and enhanced due diligence requirements focused on the financial stability of the collateral originator rather than merely the diversity of ultimate payers.

Trade credit insurers will demand more proof that insured receivables are not simultaneously pledged elsewhere, directly combating the alleged double-pledging that occurred at First Brands. The shift in underwriting focus from end-obligor diversity to originator solvency represents a fundamental change in how the industry evaluates risk. When receivables are being double-pledged at the source, the creditworthiness of Walmart or AutoZone as ultimate payers becomes irrelevant. Insurers must now verify exclusive rights to collateral before providing coverage, adding significant complexity and cost to the underwriting process.

What regulatory investigations are currently underway?

The U.S. Department of Justice has launched a criminal investigation into the mechanics of First Brands' off-balance sheet financing arrangements and the circumstances surrounding the collapse. This federal probe, reported by Bloomberg in October 2025, focuses on whether the company engaged in fraud through double-pledging of trade receivables to multiple third-party investors. The criminal nature of the investigation suggests authorities believe the conduct went beyond mere accounting manipulation into potentially prosecutable fraud.

The U.S. Trustee, the federal watchdog for corporate bankruptcies, filed court papers on October 16, 2025, arguing that "serious allegations of fraud, dishonesty, incompetence, misconduct, or mismanagement" justify an expedited process to appoint a bankruptcy examiner in First Brands' insolvency case. The Trustee's office asked the judge overseeing the bankruptcy to move up a hearing on the request from November 17 to October 29, citing the urgency created by the magnitude of potential misconduct. Bankruptcy examiners report directly to the judge and conduct investigations separate from any probes by prosecutors or federal regulators. They are regularly sought in bankruptcies where the DOJ is investigating allegations of wrongdoing, including the FTX crypto exchange failure.

Raistone demanded an independent examiner to probe the missing $2.3 billion, arguing the company's internal investigation "is woefully insufficient given the magnitude of potential misconduct at issue." The Bankruptcy Code mandates appointment of a disinterested examiner when fixed, liquidated, unsecured debts exceed $5 million and a party in interest or the U.S. Trustee requests it. This procedural requirement ensures that prepetition management, potentially complicit in the alleged fraud, cannot conduct a self-investigation. First Brands founder and CEO Patrick James resigned on October 13, 2025, along with his brother Edward James, who held a senior executive position. The new management team, led by restructuring expert Charles Moore as interim CEO, subsequently filed a lawsuit against Patrick James on November 4, 2025, accusing him of orchestrating a multibillion-dollar fraud and "misappropriating hundreds of millions (if not billions) of dollars."

What operational changes must alternative lenders implement immediately?

Lenders must move from passive verification to aggressive validation of off-balance sheet exposure. This requires obtaining explicit, written confirmation from every known trade finance provider that they do not hold claims against the specific accounts receivable or inventory assets pledged to your institution. The confirmation must be proactive during the diligence phase, not reactive post-default. Given the allegations that First Brands turned over receivables to multiple third-party factors, lenders can no longer accept borrower representations at face value. Third-party validation from factor platforms, SCF providers, and inventory financiers must become mandatory checkpoints in the underwriting process.

Loan covenant definitions require immediate amendment to capture SCF and factoring obligations as funded debt for leverage calculations. First Brands utilized approximately $2.982 billion in combined factoring and SCF facilities alongside $6.1 billion in traditional debt. If a borrower's off-balance sheet liability approaches 50% or more of its reported conventional debt, immediate forensic accounting must be triggered. The current FASB standards require disclosure in footnotes but do not mandate reclassification as financial liabilities, creating a gap that lenders must close through covenant language. Covenants should explicitly define all material factoring, SCF, or similar invoice-based financing obligations as "Funded Debt" regardless of balance sheet treatment.

Concentration limits must be recalculated using look-through aggregation rules. When financing is provided via a platform or intermediary, lenders must aggregate all exposures related to the original borrower as a single, centralized counterparty risk. The fact that Raistone derived 70-80% of its revenue from First Brands meant that any financing extended through Raistone carried indirect First Brands exposure regardless of how the underlying customer receivables were split. Institutional lenders should demand that any fintech platform or factor used by borrowers adhere to strict, independently verified limits on the percentage of total funding derived from a single client. Platform concentration exceeding 40% of total revenue from any single source should be treated as a deal-breaker absent extraordinary controls.

How should lenders triage existing portfolios for similar risk?

Portfolio review must begin with quantitative thresholds that trigger enhanced scrutiny. If a borrower's combined off-balance sheet leverage (factoring plus SCF) reaches 50% or more of its on-balance sheet debt, immediate forensic review is warranted. Court filings revealed that First Brands held $2.3 billion in factoring facilities and $682 million in SCF obligations against approximately $6.1 billion in traditional debt, meaning off-balance sheet exposure approached 49% of conventional leverage. Any similar ratio in a current portfolio company should prompt unannounced field audits and cross-verification of collateral claims.

The composition of unsecured creditor claims provides another critical diagnostic. Court filings showed that among First Brands' 30 largest non-insider creditors, the six highest claims were all SCF-related, totaling over $233 million. When working capital providers dominate the unsecured creditor list, it signals that short-term financing has become a structural dependency rather than a tactical tool. Lenders should request the full creditor matrix from borrowers and analyze whether factoring or SCF providers occupy disproportionate positions among the largest claims.

Documentation completeness serves as a behavioral indicator of risk. The failure to deliver a Quality of Earnings report during First Brands' August 2025 refinancing attempt became the trigger that exposed the company's true condition. Any borrower that delays, obstructs, or fails to deliver standard due diligence documents during refinancing or covenant testing should face immediate consequences, either through acceleration provisions or frozen access to additional capital. The resistance to providing detailed, substantiated proof of accounts receivable backing advances is a non-financial red flag that correlates strongly with fraud risk. Lenders must treat documentation obstruction as severely as covenant violations, because opacity itself is evidence of distress.

About the First Brands Case: The bankruptcy case is First Brands Group LLC, case number 25-90399, in the U.S. Bankruptcy Court for the Southern District of Texas (Houston Division), presided over by the Honorable Christopher M. Lopez. A total of 112 affiliated entities filed for Chapter 11 protection between September 24 and September 28, 2025.

Podcast Video: Bectran’s Order to Cash AI Insights

Jordan interviews Ali Kidwai, Director of Product & Engineering at Bectran, who shares insights on building a resilient platform that processes billions in B2B credit weekly.

This is a granular, "in-the-trenches" breakdown of how to apply AI to the real friction points of lending.

In This Episode, they covered:

• How to use AI in collections to tell the difference between a high-risk client and a good, predictable "slow-payer"—and why this is key to protecting your margins.

• The tactical use of AI to catch document fraud before it hits an underwriter’s desk (e.g., flagging a name mismatch like "Jordan's Bar" vs. "The Lease Bar" on a tax cert).

• The three engineering and philosophical tenets that kept Bectran alive—and growing—while technology shifted beneath their feet.

• Why Bectran’s success is built on a "configurable workflow," not a static "black box score," and how this allows them to manage risk for millions of customers at scale.

• The brilliant internal AI Bectran built to transcribe customer meetings and automatically create engineering tickets—a solution to product roadmaps being driven by politics instead of data.

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