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US prosecutors charged First Brands Group founder Patrick James and his brother Edward with fraud, accusing them of “fraudulently obtaining billions of dollars from lenders and enriching themselves”.
In the indictment unsealed Thursday, federal prosecutors in the Manhattan U.S. Attorney’s Office said that under the pair’s direction, the car parts maker falsely inflated invoices and used dual- and triple-mortgage collateral, falsified financial statements and “concealed substantial liens from lenders.” The brothers were arrested this morning in Ohio, prosecutors said.
He faces eight charges of fraud and conspiracy, and Patrick James faces an additional count of managing a continuing financial crime enterprise. Prosecutors said Peter Andrew Brumbergs, who was a senior finance executive at First Brands, has entered a guilty plea and is cooperating with the government.
Kareem Carter, an acting special agent involved in the investigation, said, “The defendants operated First Brands as a ‘Ponzi’ scheme, using the proceeds of new loans to pay back old lenders and finance their extravagant lifestyles.”
Patrick James was the founder, chief executive and sole owner of First Brands, while Edward James took a senior role in the company and oversaw most of its off-balance sheet financing.
The group’s sudden collapse into bankruptcy in September shook US credit markets, where it had raised $12 billion of financing from both mainstream lenders and private firms specializing in asset-backed financing.
In a statement, a spokesperson for Patrick James said he is presumed innocent and denies the allegations. “He 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 to the court,” the statement said.
An attorney for Edward James said: “Edward James has conducted himself with integrity and dignity during decades of hard work. Today, the government has released a long list of allegations, but has not produced a shred of evidence against him.”
The restructuring advisors handling the bankruptcy of First Brands have filed a lawsuit against Patrick and Edward James, alleging that they defrauded creditors and enriched themselves. The brothers have previously denied allegations of fraud.
According to allegations filed in bankruptcy proceedings, cash transfers from the company to Patrick James were apparently used to finance a New York City townhouse, a celebrity personal trainer and a private celebrity chef. James also allegedly purchased seven properties and an extensive car collection – including “at least seventeen foreign cars” – with the improperly transferred funds.
Prosecutors alleged that the brothers personally enriched themselves, pointing to the millions of dollars in fees Edward James received for brokering capital raising by the company, as well as the movement of cash from those fundraises into Patrick James’s personal accounts.
“By laundering funds fraudulently obtained from off-sheet lenders, the defendants were able to conceal and further their criminal schemes and personally profit from them,” prosecutors said.
The indictment details how the brothers raised billions of dollars from investors, much of it in opaque off-balance sheet financing, and how they worked to keep the alleged fraud hidden. This included using fake invoices, including transactions that allegedly never existed, as well as routing money to make it appear as if revenue was being generated by customers.
“First Brands employees routinely submitted counterfeit invoices, fraudulently inflated invoices, and double-pledged invoices for the purpose of selling and pawning them to factoring counterparties as if they represented legitimate, collectible receivables,” prosecutors said.
He alleged in one instance that Patrick James restricted certain employees from communicating with its lenders “so that no lower-level employee could inadvertently provide accurate information to an inquiring lender”. The hold occurred when an employee in 2023 shared the corrected bill with the lender, causing the lender to raise questions over the discrepancies.
Prosecutors said third parties now held approximately $2.7 billion in counterfeit receivables – money First Brands was allegedly owed from customers. They say it is owed more than $1 billion to creditors who lent money to First Brands secured by fake accounts – money that the car parts maker allegedly lent to its suppliers.
The indictment came after First Brands won approval from a bankruptcy judge to raise emergency funding from big carmakers like Ford and General Motors to prevent the disorderly shutdown of their operations.
In a statement filed in Houston bankruptcy court this week, First Brands interim chief executive Charles Moore wrote that the money was needed from carmakers “to avoid immediate liquidation” of the company, which had insufficient funds to sustain its operations “beyond the current week.”
First Brands had raised a $1.1 billion rescue loan from lenders when it filed for bankruptcy in September, but ran out of cash and was not able to raise further financing from these creditors.
The FT reported before First Brands’ bankruptcy that Patrick James faced fraud allegations from creditors of collapsed former businesses, including allegations of “misrepresentation” around financing backed by customer invoices. James denied fraud charges in these cases, which were settled before trial.
The FT first reported in October that prosecutors were investigating the collapse of First Brands.
Additional reporting by Amelia Pollard
