US bankruptcy watchdog wants independent probe of First Brands

First Brands already investigating $2.3 billion in missing funds

U.S. Trustee says auditor will ensure transparency, reliability

Creditor Raistone had previously requested an inspector appointment

NEW YORK, Oct 16 (Reuters) – The U.S. government’s bankruptcy watchdog has asked a judge to appoint an independent auditor to investigate First Brands, saying the auto parts maker’s creditors need an impartial explanation for the company’s collapse, which has rattled debt investors in recent weeks.

The U.S. Trustee, a part of the U.S. Department of Justice that oversees bankruptcy matters, said in a brief filed Wednesday that “there is sufficient reason to suspect that current members of debtors’ boards or executive management team may have engaged in actual fraud, dishonesty or criminal conduct in the management of debtors’ business affairs.”

First Brands filed for bankruptcy protection in September after creditors began investigating irregularities in the company’s financial reporting and one of its creditors, trade finance firm Raistone, later said $2.3 billion had “disappeared” from the company’s books. The company’s total debt is $11.6 billion, according to court documents.

The U.S. Trustee called on U.S. Bankruptcy Judge Chris Lopez in Houston, who is overseeing First Brands’ bankruptcy, to expedite the appointment of an administrator and issue a decision by Oct. 29. Lopez has currently scheduled a hearing for Nov. 17 on an earlier request for an auditor from Raistone.

First Brands did not immediately respond to a request for comment.

The company’s collapse has caused volatility in credit markets in recent weeks and highlighted the exposure of some of the world’s leading financial institutions. The company’s CEO, Patrick James, resigned from his position earlier this week.

SPECIAL COMMITTEE INVESTIGATES FINANCING Irregularities

First Brands has appointed a special committee of independent directors to investigate irregularities in the company’s use of third-party factoring arrangements to generate short-term cash flow.

First Brands sold the invoices to third-party financial institutions, allowing it to collect funds before the customer paid, and the company is investigating whether some invoices were sold twice to multiple recipients and whether First Brands retained some customer payments that should have been transferred to the invoice recipient.

The U.S. Trustee said the investigation would be better conducted by an independent auditor who would provide greater credibility from company insiders who may have been involved in fraud or mismanagement. An auditor will also publicly report their findings, something First Brands’ board is not required to do, according to the U.S. Board of Trustees.

Bankruptcy examiners are often appointed in cases where a company’s management is suspected of fraud, as in the cases of collapsed cryptocurrency firms Celsius and FTX. (Reporting by Dietrich Knauth, Editing by Alexia Garamfalvi and Diane Craft)