First Brands Founder Charged With Fraud That Wiped Out Billions
(Bloomberg) — First Brands Group founder Patrick James and his brother Edward, a former executive at the company, were indicted in New York after the bankrupt auto parts maker collapsed last year.
According to the federal indictment, the two engaged in a series of schemes to defraud the company’s lenders and financing partners. The United States alleged that the brothers created and inflated false invoices for accounts receivable, double- and triple-encumbered loan guarantees, falsified financial statements, and concealed debts from lenders.
Patrick, 61, and Edward, 60, were arrested this morning in Ohio and are expected to appear in federal court on Thursday, authorities said.
“Patrick James, along with his brother Edward James, committed a stunning fraud at First Brands Group,” Jay Clayton, U.S. Attorney for the Southern District of New York, said in a statement. “The James brothers generated billions of dollars for First Brands and millions for themselves by presenting lenders with the impression of a successful, growing international business.”
In reality, Clayton said First Brands was “a business run on fraud, false documents and false financial data.”
Clayton also announced that former company executive Peter Brumbergs had admitted his role in the scheme and was cooperating with prosecutors.
According to the indictment, First Brands’ lenders now face “billions of dollars in losses” as a result of the alleged schemes. Court documents say the company filed Chapter 11 with just $12 million in corporate accounts and more than $9 billion in debt.
The brothers were each charged with nine counts, including continuing financial crime enterprise, wire fraud, bank fraud, wire fraud conspiracy and money laundering conspiracy.
The top charge of operating an ongoing financial crime enterprise carries a maximum penalty of life in prison.
“Patrick James is presumed innocent and denies these charges,” his spokesman said in an emailed statement. “He has built First Brands from scratch into a global industry leader and has always been dedicated to the company’s success. Mr. James looks forward to presenting his case in court.”
The indictment depicts a series of complex financial maneuvers, including the use of fake invoices and the deception of financiers into sending money to an invoice processing agent. The US claims the financiers believed the money would pay First Brands’ suppliers, but it actually went to the company itself.
“Their purpose was to inject additional cash into First Brands when the company could not meet its payment obligations with the legitimate cash on hand,” the indictment alleged. “The ’round trip’ funds went towards paying interest on debt, rent, leases or other operating costs rather than paying suppliers.”
Prosecutors describe repeated deceptions to top lenders about the company’s off-balance sheet debt. According to the indictment, although “the James entities incurred billions of dollars in inventory-based liabilities through the use of First Brands’ inventory,” First Brands flatly denied such financing.
“Predatory” Applications
Patrick James’ lawyers had previously rejected similar allegations of impropriety made by First Brands’ bankruptcy advisers and lenders, attributing the company’s financial woes to macroeconomic factors such as tariffs.
James also blamed lenders for First Brands’ bankruptcy, saying in court documents that firms that provided off-balance sheet financing to his company engaged in “predatory” practices and charged hefty fees. The lenders rejected James’ allegations and blamed First Brands’ Chapter 11 lawsuit on alleged fraud involving the former chief executive officer.
James resigned as chief executive officer in October, shortly after First Brands filed for Chapter 11.
Edward James left his position as vice president shortly after the company sought court protection, according to bankruptcy documents. He was sued by the company and creditors for allegedly conspiring to defraud creditors of billions of dollars in property.
“Mr. Edward James acted with integrity and honor throughout decades of hard work. Today, the government issued a long list of accusations but failed to present a single shred of evidence against him,” his attorney, Seth DuCharme, said in an emailed statement. “This morning’s arrest in Ohio was unnecessary theater. We look forward to performing on his behalf in New York and have full confidence in Mr. James.”
Restructuring advisers who now run the company told a bankruptcy judge in Houston on Thursday that the fraud was more widespread and damaging than they initially realized when the company filed its Chapter 11 case in September.
At least 4,000 employees in North America have lost their jobs because the company was unable to maintain some of its operations, such as its brake division, bankruptcy attorney Sunny Singh said today.
Another 13,000 jobs are at risk as the company operates on a weekly basis using a $48 million lifeline from automakers that have agreed to pay upfront for parts, according to court documents.
The case is US v James, 26-cr-29, US District Court, Southern District of New York.
–With help from Jonathan Randles and Steven Church.
(Updates with details of the indictment, arrests of Patrick and Edward James, comment from the U.S. Attorney at SDNY, attorneys for Edward James and First Brands’ bankruptcy hearing on Thursday.)
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